NAICS codes are a standardized system for classifying business activity, and confusion often exists regarding the number of codes a single entity can hold. The general assumption that a business should only have one code is not entirely accurate, as the answer is nuanced depending on the context. Government agencies and contractors require a specific designation, while the system itself allows for broader identification of a company’s diverse operations. Understanding this distinction is important for tax compliance, statistical reporting, and accessing opportunities like government contracts.
Understanding the North American Industry Classification System
The system is a joint effort between the United States, Canada, and Mexico to create a common standard for statistical analysis across North America, replacing the older Standard Industrial Classification (SIC) system in 1997. This classification is applied to business establishments based on the primary type of goods produced or services provided.
The structure of this classification system is a six-digit hierarchical code that progressively narrows the definition of the business activity. The first two digits identify the economic sector, such as Manufacturing or Retail Trade, and there are 20 possible sectors in the 2022 specification. Subsequent digits drill down to the subsector, industry group, and finally the specific national industry. Beyond statistical use, these codes are utilized for government regulation, tax purposes, and the procurement process to identify potential suppliers and contractors.
The Direct Answer: Multiple Codes Are Allowed
A business is not limited to a single classification and can identify with multiple codes to reflect all its active revenue-generating operations. Companies with diversified operations often engage in activities that span several distinct industry classifications, such as manufacturing, distribution, or maintenance.
The distinction is that while a company can use multiple codes to describe its full range of services, government agencies require the designation of only one Primary NAICS Code. This single code represents the company’s main line of business and is used for official government functions like tax filing and reporting to the Census Bureau. Any additional classifications are considered secondary codes, representing legitimate but less significant revenue streams.
Why Secondary NAICS Codes Are Crucial
Secondary codes provide a complete picture of a company’s capabilities, extending its reach beyond its primary industry classification. Acknowledging multiple codes is important for participation in the federal marketplace, as it expands a company’s eligibility for government contracts. Each NAICS code is linked to specific size standards set by the Small Business Administration (SBA), which determine if a company qualifies as a small business for a particular contract opportunity.
Listing secondary codes allows a business to bid on contracts or qualify for specific SBA programs that align with those secondary activities. For example, a consulting firm with a primary code in professional services could use a secondary code related to software development to bid on technology-focused government solicitations. Utilizing all applicable codes enhances a company’s visibility to procurement officers searching the System for Award Management (SAM.gov) database. Furthermore, accurately reporting secondary codes ensures the company is subject to the correct industry-specific regulations and licensing requirements.
Determining Your Company’s Primary NAICS Code
Government bodies, including the Internal Revenue Service (IRS) and the Census Bureau, use a methodology known as the Principal Activity Rule to select the single primary code. This rule mandates that the primary code must be the one that represents the activity generating the largest share of the company’s total annual revenue.
When a company has several distinct operations, the revenue figures must be analyzed to determine which activity is generating the greatest value-added. For instance, if a construction company’s largest revenue source shifts from residential building to civil engineering projects, the primary code must be updated to reflect the new financial reality.
This determination is required for tax filing, as the code is reported on forms like IRS Form 1120 for corporations and Schedule C for sole proprietors. Using the correct code allows the IRS to accurately compare the business with others in the same industry during compliance checks.
Managing and Updating Your Business Codes
Business owners can look up the complete list of classifications and search for their codes using the official NAICS website provided by the U.S. Census Bureau. The system is periodically reviewed and updated by the Census Bureau every five years to reflect changes in the modern economy. Businesses should conduct regular reviews of their operations to ensure their classification remains accurate, especially when revenue streams shift or new services are introduced.
The primary code, and any relevant secondary codes, must be reported on various official documents and systems. This includes annual tax forms submitted to the IRS and the business’s registration in the System for Award Management (SAM.gov) for those engaging in federal contracting. If the business fundamentally changes its revenue focus, the primary code should be updated in these systems to maintain compliance and ensure eligibility for opportunities. Updates to the SAM.gov profile are made in the Core Data section of the entity registration.