Final answer:
After calculating Kathy's net earnings from self-employment for 2021 by subtracting her business expenses and the deductible part of her self-employment tax from her revenues, the maximum SEP IRA contribution she can make is $58,000 (option a), which is the limit set for the year 2021.
Step-by-step explanation:
The question is asking for the maximum amount Kathy can contribute to a SEP (Simplified Employee Pension) IRA based on her self-employment income and expenses for the year 2021.
To determine the maximum SEP IRA contribution, we must calculate Kathy's net earnings from self-employment, which will consider her revenues, expenses, and the deductible part of her self-employment taxes.
The formula to calculate the maximum SEP IRA contribution for a self-employed individual is:
Net Profit - 1/2 Self-Employment Tax = Net Earnings
Net Earnings x Contribution Percentage (up to 25%) = Maximum SEP IRA Contribution
First, we must calculate the deductible portion of Kathy's self-employment tax:
Self-Employment Tax = $30,986
Deductible Part of Self-Employment Tax = $30,986 / 2 = $15,493
Next, we calculate Kathy's net earnings:
Revenues - Expenses = Net Profit
$500,000 - $100,000 = $400,000 Net Profit
Net Profit - 1/2 Self-Employment Tax = Net Earnings
$400,000 - $15,493 = $384,507 Net Earnings
Finally, we calculate the maximum SEP IRA contribution:
$384,507 x 25% = $96,126.75
However, for 2021, the SEP IRA contribution limit cannot exceed $58,000. Therefore, Kathy can contribute a maximum of $58,000 to her SEP IRA for 2021.