Financial responsibilities for the self-employed

One of the fastest growing segments of America's workforce is the self-employed. Being your own boss can be liberating, but it's also hard work: Many bothersome details your employer used to handle become your responsibility – things like finding health insurance, deducting taxes, and setting up retirement savings.

Here are a few considerations before hanging out your own shingle:

Health insurance. Sure, it's expensive, but going without health insurance is extremely risky. More than half of all personal bankruptcies stem from overwhelming medical bills. (The silver lining: Health insurance premiums are fully deductible for the self-employed, considerably lowering taxable income.) Options include:

• Coverage through your spouse's plan or a trade or professional organization to which you belong.
• COBRA continuation coverage through your former employer's plan. (Double-check eligibility requirements and enrollment deadlines.) Typically COBRA provides benefits for 18 months (sometimes longer) and costs 102 percent of the full premium.
• Private insurance. An insurance broker can help you find appropriate coverage – try the National Association of Health Underwriters if you don't know one (www.nahu.org). Be aware that even minor preexisting conditions may render you ineligible.
• High-deductible plans provide comprehensive coverage for catastrophic illnesses that could otherwise deplete your savings, but their monthly premiums are considerably cheaper than comparable low-deductible plans.
• Combining a high-deductible plan with a Health Savings Account (HAS) can yield additional savings. These accounts let you save pretax dollars in an interest-earning account and later withdraw the money, tax-free, to pay for medical expenses. HSA contributions are tax-deductible, even if you don't itemize deductions.
• Many states provide high-risk insurance for people who don't qualify for private insurance. It's costly, but no one can be turned away. Visit www.naschip.org for information.
• Health Insurance Portability and Accountability Act (HIPAA) insurance may provide coverage if your COBRA has expired and you don't qualify for private insurance. Eligibility rules are very complicated so consult a knowledgeable insurance broker.

Tax implications. The good news is: Self-employed people can deduct many business-related expenses from their taxes. The bad news is: You must pay the full 15.3 percent tax for Social Security and Medicare. Although you can deduct a portion of this so-called self-employment tax, depending on your net earnings, you still effectively pay more than someone whose employer pays half the amount (called "FICA" on a W-2 form).

Also, because you don't have an employer withholding taxes from each paycheck, you are responsible for making quarterly estimated tax payments; otherwise, you'll face underpayment penalties. Search "Self-employed" at the IRS website (www.irs.gov) for more information on your tax responsibilities.

Saving for retirement. Because you won't be earning employer-provided pension or 401(k) benefits, you must manage your own retirement savings strategy. Fortunately, there are many options available, including regular and Roth IRAs (to which you may contribute up to $5,000 a year, or $6,000 if over 50), and Simplified Employee Pension (SEP) IRAs, which let you save even more – up to 25 percent of pay in many cases.

Consider hiring a tax professional or financial planner specializing in self-employment issues – they'll probably more than pay for their fees through sound advice. A good place to start your search for a financial planner is www.plannersearch.org.

Many self-employed people would never go back to the old 9 to 5; just be sure you understand the financial responsibilities involved before taking the plunge.