Final answer:
Kathy can contribute the lesser of 25% of her net self-employment earnings or $57,000 to her SEP IRA in 2020. To find the exact amount, one needs to perform a calculation involving Kathy's net earnings from self-employment and considering a reduction for the self-employment tax deduction. The options provided exceed the maximum limit allowed for that year.
Step-by-step explanation:
The question relates to the maximum amount that Kathy can contribute to a SEP IRA for the 2020 tax year based on her self-employment income. An SEP IRA, which stands for Simplified Employee Pension Individual Retirement Account, is a retirement plan specifically designed for self-employed individuals and small business owners. According to IRS rules, the contribution limit for a SEP IRA is the lesser of 25% of an individual's compensation or $57,000 for the year 2020. Kathy's net earnings from self-employment, after subtracting her expenses from her revenues, is $67,200 ($109,000 - $41,800).
To calculate the eligible contribution for a SEP IRA, we use the formula for calculating net self-employment income, which involves subtracting her expenses from her total revenue, then reducing that by the self-employment tax deduction. The equation for the SEP IRA contribution is essentially net self-employment income multiplied by the contribution rate (approximately 20% after the self-employment tax adjustment). However, without going through the complex calculations for determining the exact self-employment tax deduction, we cannot calculate an exact amount she can contribute here but can confirm that none of the provided options would be correct since they all exceed the maximum limit for 2020.