If you don’t know what your company’s North American Industry Classification System (NAICS) code is, now is the time to determine what it is.
The NAICS code system is used by your company’s health insurance carrier, your worker’s comp carrier, and a variety of other insurance companies to compute premiums and risk.
The Internal Revenue Service uses it to make decisions about whether your tax returns look in line with other businesses in your industry. If your NAICS code is wrong and the IRS thinks your deductions aren’t like others in your peer group, you might have a higher chance of being audited.
Lastly, lenders use the NAICS code to compare statistics about your peers to you. Lenders make industry comparisons to see how closely you compare to other businesses. Red flags can be inadvertently caused because the lender picked the wrong NACIS code for your business.
Often a business may have a primary NAICS code (which means that code best fits your business) and a secondary code (meaning your business also has characteristics of the second industry.
It is helpful to understand the NAICS classification system. The NACIS starts with 20 primary industries: These are often called the two digit codes:
2 digit code
Agriculture, forestry, fishing and hunting
Transportation and Warehousing
Finance and Insurance
Real Estate and Rental and Leasing
Professional – Scientific and Technical Services
Management of Companies and Enterprises
Administrative and Support and Waste Management and Remediation Services
Health Care and Social Assistance
Arts – Entertainment and Recreation
Accommodation and Food Services
Other Services (except Public Administration)
Industries Not Classified
In the NAICS hierarchy there are 96 subcategories (3 digit codes) and 317 industry groups (4 digit groups). To properly determine your primary and possible secondary NAICS code you must work down the classification scheme until you find the best fit for your business. It is often the case that you determine that there is really no perfect fit when you get down to the four digit level. For each two, three and four digit level there is an option, usually the last one shown, that says, “Not otherwise classified.” This is the choice to pick when you don’t fit close enough to a specific code.
The NAICS Association has a Web site that allows you to navigate through keyword search or through the system hierarchy to determine a classification.
Always be sure anyone using the NAICS code to classify your business for a service or insurance policy is using the correct one or two codes that best fit you. This assures that your rates are consistent with your true risk and that your business is being properly compared to your peers.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
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