Final answer:
The correct contribution for a SEP IRA in 2019 for a sole proprietor is the lesser of $56,000 or 20% of adjusted net earnings. Self-employed individuals must pay both the employee and employer portions of Social Security and Medicare taxes. The Social Security tax is regressive.
Step-by-step explanation:
For the year 2019, the owner of a sole proprietorship can make annual contributions to his Simplified Employee Pension (SEP) IRA for the lesser of (1) a specific dollar amount or (2) a certain percentage of Schedule C income, after reducing the net income by the deduction for the employer's portion of self-employment taxes paid. The correct answer to this question is c) $56,000; 20%. This means the owner can contribute the lesser of up to $56,000 or 20% of their adjusted net earnings from self-employment.
If an individual is self-employed and the business is not incorporated, they must pay both the employee and employer sides of the payroll taxes, which includes Social Security and Medicare taxes. Social Security tax is 6.2% of the employee’s income up to a certain threshold, and Medicare is 1.45% of the entire income without a cap. For self-employed individuals, these rates double because they must pay both the employee and employer portions.
The Social Security tax is considered regressive, as it applies only to incomes below a specific limit ($113,000 as of the mentioned tax year), meaning higher income individuals pay a smaller percentage of their total income towards this tax compared to lower income individuals.