Kathy is 48 years of age and self-employed. During 2020, she reported $100,000 of revenues and $40,000 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 an individual 401(k)for 2020?Assume she paid $8,478 of self-employment tax for 2020. (Round your final answer to the nearest whole number.)
A)$19,500.
B)$30,652.
C)$37,152.
D)$57,000.

Question

Quizplus · Accepted Answer

For 2020, the maximum contribution to an individual 401(k) for someone under 50 years of age consists of two parts: the employee contribution limit of $19,500 and an additional employer contribution. The employer contribution is calculated as 20% of net earnings from self-employment. Net earnings from self-employment are calculated by subtracting business expenses from revenues and then subtracting half of the self-employment tax. In Kathy's case, her net earnings are $60,000 ($100,000 - $40,000), and half of her self-employment tax is $4,239 ($8,478 / 2). Therefore, her adjusted net earnings are $55,761 ($60,000 - $4,239). The employer contribution is 20% of $55,761, which is $11,152. Adding this to the employee contribution limit of $19,500 gives a total of $30,652.

Kathy Is 48 Years of Age and Self-Employed