Question

Robert (single, age 42) set up a SEP plan for his small business. He has no...

Robert (single, age 42) set up a SEP plan for his small business. He has no employees. The maximum contribution rate as shown in the plan is 18%. Robert's profit from his business was $18,699 and he paid $2,642 in self-employment taxes. What is Robert's maximum contribution to his SEP?

A)$2,449 B)$2,651 C)$3,128     D)$3,366

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Answer #1

The correct option is (B)

SEP (Self Employment Plan) contribtion

If a person is self employed he can have contribution maximum of 25% of his adjusted net earnings from self employments

Adjusted Net Earnings = business revenu - all allowable expenditures

This Net Earning should be adjusted by reducing !/2 (half) of self employment tax paid

In short SEP calculation is as follows

Adjusted Net Earnings

Roberts Profit from business =$18699

Less: 1/2 of self employment tax paid (1/2 of $2642) =$1321

Net adjusted Earnings =$17378

then we have to deduct SEP calculation amount too from this $17378 that is shown below

$17378 is 118% (comprising net eranings afeter SEP 100% +18% SEP)

we can find net eranings by doing the following =$17378X100/118

=$14727

Calculation of SEP contribution

Percentage of contribution 18%

therefore amount = adjusted net earnings x18%

=$14727x(18/100)

=$2651

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