What Is a NAICS Code and Do You Need One?
- July 20, 2021
- 6 min read
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Ever wondered why certain businesses get approved for federal contracts while others are ignored? Or have you ever asked how you should classify your business relative to other enterprises in the market? Both questions’ answers lie in NAICS codes.
NAICS codes are specialized government codes used to classify businesses just like yours for the purpose of economic analysis and statistical understanding. More importantly for you, NAICS codes are also needed so you can get government contracts, qualify for certain businesses for various loans, and even receive special businesses tax breaks.
NAICS stands for, “North American Industry Classification System”.
Without getting too technical, this system is used by most Federal statistics and analytics agencies. Through this system, they are able to classify businesses so they can analyze and publish data about the US economy. That data then shows up in official reports that government individuals and commercial enterprises themselves use.
All NAICS codes are created by the Office of Management and Budget, which is itself a branch of the broader executive branch in the US government. The manual is updated every few years, with the most recent being created in 2017. You can find it on the US Census Bureau’s website.
In this system, every industry has a separate title and related description. Therefore, you can classify your business using the NAICS code that most relates to its operations and purpose. For example, some codes are for businesses in the construction industry, others for food manufacturing companies, and others for IT consulting firms.
Why do we use this system? Originally, the US used the SIC or Standard Industrial Classification system. However, this system was historically clunkier and harder to use than the modern NAICS system. Furthermore, the NAICS system is used by Canada and Mexico as well, establishing a unified North American standard classification system.
No, and you may not be required to have such a code. However, if you are a government contractor, you will be assigned a code automatically since the government will classify your business for the purpose of data analytics.
But not every private company absolutely needs a NAICS code. Still, it’s a good idea to get one for several key reasons. While getting a NAICS code is helpful to the federal government for analyzing the state of the economy, it also provides your business with several practical and tangible advantages.
For starters, having a NAICS code and downloading the manual will allow you to classify businesses, customers, or client companies that your company does business with. For example, if you are a government contractor, you can use the NAICS system to classify your clients and figure out where most of your business is coming from.
This, in turn, can be helpful when you are determining:
- Where you should focus your business efforts next
- How you should evolve your business in the long term
- And more
More importantly, NAICS codes are vital if you want to get access to federal contracts. The Small Business Association or SBA indicates that the federal government typically awards nearly 20% of its available federal contracts to SBA-certified businesses.
If you want to be SBA-certified, you have to have a NAICS code. For businesses in construction, design, IT development, and more, federal contracts can be quite lucrative and very stable work opportunities for years to come.
In this way, NAICS codes directly impact your ability to turn a profit. Furthermore, you can receive other benefits, such as being recognized as a VOSB or veteran-owned small business. The Department of Veterans Affairs requires your business to have a NAICS code in order to qualify for this distinction. This, as well, makes it more likely that you’ll be awarded federal contracts for various work.
Aside from being more likely to receive federal contracts, your business will also receive benefits from incentive programs if it has a NAICS code. Many state governments use NAICS to offer different tax incentives depending on the industry.
For example, Kansas’ Department of Commerce provides an incentive program for any business that decides to invest in solar and wind energy. If you want to apply for this incentive, you have to provide at least one NAICS code for your business.
Not sure whether it’s worthwhile? Take a look at the tax incentives your state government is currently offering. Odds are the government page will explain what your business needs if you want to apply for the incentives.
Many small businesses need loans from time to time, whether it’s for purchasing new equipment or property, for committing to a business expansion, or for relieving other types of debt.
Various commercial lending services frequently use NAICS codes in order to approve different businesses for certain loans. For example, NAICS codes can help indicate whether a given business qualifies for the loan’s intent by classifying it into a particular industry.
Furthermore, lending organizations use NAICS codes to identify industry risks that may impact your qualification for a given business loan. Be sure to have at least one accurate NAICS code to qualify for as many small business loans as possible.
Beyond the above-mentioned state-focused tax benefits, the IRS also uses NAICS codes to determine whether your tax returns are accurate relative to the other businesses in your industry.
Suppose you don’t have a NAICS code or have an incorrect NAICS code. In that case, the IRS could compare your business deductions to deductions from non-competitor businesses, leading them to draw incorrect conclusions about how much money you owe or should receive on your tax return.
You also have a higher chance of being audited or fined if your NAICS code is incorrect.
Even business owners looking to get insurance should consider applying for a NAICS code. That’s because insurance providers often use the NAICS code system for worker’s compensation, health insurance, and more.
Given all the benefits you could receive, it’s a no-brainer to sign up for a NAICS code as soon as possible. Fortunately, this system is self-assigned. That means another organization or the authoritative body doesn’t assign you a NAICS code.
Instead, it’s up to you to select the code that best depicts your primary business activities or purposes. Then you can use that code whenever a loan application or another form asks for it.
What if your business technically does more than one thing?
For example, maybe you manufacture boats but also sell boating gear. In that case, you can use more than one NAICS code and will simply need to apply the code that seems most applicable to the given loan document.
Figuring out which NAICS code is right for you should be fairly straightforward. NAICS codes are separated into two different sizes. Therefore, you can immediately begin by choosing a NAICS code for a “small” or “other than small” business based on its size, employee pool, and more.
- The number of employees in your company
- The company’s annual revenue
- The company’s location
- And more
will also determine your code.
Here are some examples of NAICS codes:
- 517110 – Wired telecommunication carriers
- 541611 – Administrative management and general management consulting services
These codes, you should note, are based on average sizes of things like annual revenue and employee numbers. In the end, you’ll have to choose the code that best fits your business rather than find a code that is perfectly tailored to your business’s unique factors or attributes.
NAICS codes are quite important and one of the best ways to benefit from a variety of government incentives, tax programs, and insurance deals. It’s a good idea to take a look at the government’s list of NAICS codes and apply for at least one ASAP.
NAICS codes both help the government classify your organization and add your data to its vast stores of economic information and help your business turn more of a profit or save money each year. There’s no downside to signing up for one of these codes.
Want to know more about how to classify your business or check out some loans where you can use your new NAICS code? Seek Capital is the perfect place to find business loans and get more advice about how to run your business successfully for years to come.
Contact us today for more information.
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