Why Your NAICS Code Matters
Your NAICS code is a six-digit number that identifies your business's primary activity. While it might feel like bureaucratic paperwork, choosing the correct code is important because it can affect your business's financial operations and opportunities.
Getting it right helps you:
- Ensure Proper Tax Reporting: The IRS and state agencies use this code to understand your business type. This impacts certain deduction opportunities and helps tax authorities compare your activity to industry benchmarks.
- Access Financing: Banks, credit unions, and the SBA use your NAICS code to assess industry risk and determine your eligibility for loans and credit programs.
- Qualify for Contracts: It can open doors to government contracts and industry-specific certification programs.
- Stay Compliant: It ensures you’re properly classified for statistical reporting and applicable industry regulations.
What Is a NAICS Code?
Note: Whether you're on Collective's LLC tier (filing Schedule C) or S Corp tier (filing Form 1120-S), your business needs a North American Industry Classification System (NAICS) code. This code is a federal requirement that affects your tax reporting, financing options, and other essential business activities.
The NAICS system is the standard federal agencies use to classify businesses. The six digits are broken down to pinpoint your industry with increasing specificity. NAICS codes are structured hierarchically:
- The first two digits represent the sector (like manufacturing or retail).
- The third digit represents the subsector.
- The fourth digit represents the industry group.
- The fifth digit represents the NAICS industry.
- The sixth digit represents the national industry.
Example: The code 541430 – Graphic Design Services starts with 54, identifying the broad sector of Professional, Scientific, and Technical Services.
How to Find Your Correct NAICS Code
Selecting the right code is generally straightforward: choose the code that accurately reflects the business activity that generates your primary income stream.
- Start with the Official Search Tool: Use the U.S. Census Bureau’s NAICS tool at https://www.census.gov/naics/ to search by keyword or browse through industry definitions.
- Focus on Primary Revenue: If you have multiple income streams, pick the code for the activity that accounts for the largest portion of your revenue. For example, if 80% of your income is from web design and 20% is from selling digital templates, you'd use the web design code.
Common Codes for Solopreneurs
When you're self-employed, the correct NAICS code is crucial for tax and statistical reporting. To keep things simple, the most common codes for solopreneurs tend to fall into a few key areas. Below are some of the most frequent codes we see:
- 541611 (Administrative Management and General Consulting Services): Common for business coaching and management consulting.
- 541618 (Other Management Consulting Services): Use for consulting that doesn't fit the 541611 category.
- 541990 (All Other Professional, Scientific, and Technical Services): Often used for freelance writing and virtual assistance (VA).
- 541430 (Graphic Design Services): Includes services like branding, logo creation, and digital design.
- 541511 (Custom Computer Programming Services): The right code for software development and app coding.
- 541810 (Advertising Agencies): Covers marketing strategy and running ad campaigns.
When and Where You Need Your NAICS Code
You'll need to provide your NAICS code in several key areas of your business operations:
- Tax Filings: It's used on your federal business tax returns (Schedule C for LLC tier, Form 1120-S for S Corp tier).
- Banking and Financial Applications: For opening business accounts or applying for loans/credit cards.
- Business Registration: Used when registering your LLC or filing annual reports in some states.
- Insurance: Helps determine risk and set appropriate coverage levels.
How Collective Supports Your NAICS Code
We understand that maintaining all your financial and tax inputs in one system is the key to running your business smoothly.
At Collective, we help ensure your NAICS code is properly applied across your documents and tax filings by:
- Reviewing Business Activities for correct classification based on the information you provide.
- Updating Codes if your business activity changes, ensuring consistency across your documents.
Can You Change Your NAICS Code?
Yes! If your primary business focus shifts—for example, a change in your main revenue source or a pivot in your business model—you should notify our team. We'll help ensure your code is updated in all the right places, including your tax information.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as legal, financial, or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate and/or licensed adviser, or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.