Question

Kathy is 60 years of age and self-employed. During 2021 she reported $500,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to a SEP IRA for 2021? Assume she pays $30,986 in self-employment tax for 2021.

a. $58,000
b. $64,500
c. $93,801
d. $86,153

Answer 1

The maximum amount Kathy can contribute to a SEP IRA for 2021 is $58,000, which is the lesser of 25% of her net earnings from self-employment or $58,000, the limit for the year.

Step-by-step explanation:

The question is asking about the maximum contribution Kathy can make to a SEP IRA based on her self-employment income and expenses for the year 2021. To determine the maximum SEP IRA contribution, one must first calculate the net earnings from self-employment, which are subject to self-employment tax.

The formula to calculate the net earnings is:
Net Earnings = Gross Income - Business Expenses - 0.5 * Self-Employment Tax

In Kathy's case:

• Gross Income (Revenues): $500,000
• Business Expenses: $100,000
• Self-Employment Tax: $30,986

So the net earnings calculation would be:
Net Earnings = $500,000 - $100,000 - 0.5 * $30,986 = $434,507

The SEP IRA contribution limit is the lesser of 25% of net earnings or $58,000 for 2021. Therefore:

Max SEP Contribution = 25% of $434,507 = $108,626.75, which exceeds the limit, so the maximum contribution Kathy can make is $58,000.