A NAICS code is used to categorize businesses in North America. Discover how to calculate an NAICS code and how businesses and federal statistical agencies use this six-digit code.
A NAICS code categorizes businesses in the United States, Canada, and Mexico. NAICS is an acronym that stands for North American Industry Classification System. When collecting and sharing data on the US economy, federal agencies and businesses use this six-digit code to standardize and classify companies. Each business establishment has a self-assigned code that describes its primary business activity under NAICS. Various government agencies host NAICS-based corporate registries.
The Standard Industrial Classification (SIC) code, which was the previous classification scheme, was replaced by the NAICS system in 1997. The new system is more precise, better suited to contemporary businesses, and the state of the economy.
How To Use NAICS Codes
The industry, sector, and specialty that best describes the company's line of business are used by business owners to determine their NAICS code number. NAICS codes can be used by businesses and federal agencies for a variety of purposes, including:
1. Bidding on government contracts: If your company wants to win a government contract, it must have the correct NAICS code. Similarly, being able to identify NAICS codes on a list of various government contracts and eligible companies will make the process easier. Furthermore, the SBA (Small Business Administration) designates size standards for businesses eligible for contracting programs using NAICS industry codes.
2. To file taxes: NAICS codes are used by the Internal Revenue Service (IRS), the Office of Management and Budget (OMB), the US Census Bureau, and other US government agencies, as well as related government agencies in Mexico and Canada, such as Statistics Canada, for taxation and tax credits.
3. Identifying and locating customers: Many businesses sell goods and services to other businesses. Businesses can use NAICS codes to acquire new customers or to categorize and collect information about existing customers.
4. Submit regulatory paperwork: Permits and zoning paperwork must adhere to strict environmental regulations and include a company's NAICS code.
How To Determine a NAICS Code
Consider the following code components when determining the appropriate NAICS code for your company:
Sector: The first two digits indicate the economic sector in which the company operates. Take a look at the NAICS code 111411. The first two digits—11—denote the agricultural, forestry, fishing, and hunting industries. Manufacturing is represented by numbers 31-33, educational services by number 61, and arts, entertainment, and recreation by number 71.
Subsector: The third number in the NAICS code refers to the subsector of the business. In NAICS code 111411, for example, the third digit indicates that the business is crop production, a subsector of the agricultural sector.
Industry group: The fourth digit denotes the industry sector. In the NAICS code 111411, for example, the 4 denotes greenhouse, nursery, and floriculture production, further refining the business description.
Industry: The fifth digit denotes the industry of the company. For example, NAICS code 111411 denotes that the company primarily operates in the industry category of food crops grown under cover, such as mushrooms.
National industry: This sixth and final number refers to the industry and its country. For example, the number 1 represents the United States. As a result, NAICS code 111411 may describe a mushroom cultivation business in the United States.
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