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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