Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute and deduct 25% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the:
a. Self-employment tax.
b. Self-employment tax and one-half of the deductible Keogh contribution.
c. Deductible Keogh contribution and one-half of the self-employment tax.
d. Deductible Keogh contribution.
Answer:C
Choice "c" is correct. For Keogh plans, earned income is defined as net self-employment earnings reduced by the amount of the allowable Keogh deduction and ½ the self-employment tax.
Choice "d" is incorrect. For Keogh plans, earned income is also reduced by ½ the self-employment tax.
Choice "a" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax, not the entire tax.
Choice "b" is incorrect. For Keogh plans, earned income is reduced by ½ the self-employment tax and the full amount of the deductible Keogh contribution.