Updated: Mar 7
We will start with the horse’s mouth - Direct from www.Census.gov: "The North American Industry Classification System (NAICS) is the standard used by Federal statistical agencies in classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy."
NAICS are 6 digit numerical codes that correspond to industry (hence the name)… But, alas it isn’t quite that simple so let’s see if we give a quick overview of the NAICS concept and mitigate some confusion and make some sense of these codes.
There are 1,023 NAICS in Census.gov (https://www.census.gov/naics/) and the idea is for you to search some key words and choose one that most matches your “core” product or service offering. Your NAICS selection may seem trite (and sometimes it is) but it can play an important role - especially if you want to sell to the government (and potential SBA financing) so you will want to be conscious of how NAICS impact your company’s registrations. Registrations? Yes NAICS are used in many places as registrations – and sometimes they really matter.
First, if you want to do business with the feds, you have to have a SAM.gov registration. This is supposed to be an easy do-it-yourselfer kind of website but it is so backlogged (as of 9/2022) that it is taking months for them to be accepted and approved. We will address that in another article but let’s just say that when you register in SAM.gov, you have to pick a “Primary NAICS” code. Now, this should also correspond to your IRS tax records that associate with your EIN, which you also need to register with SAM.gov.
The trouble with NAICS codes vs IRS codes
In typical government fashion, the IRS has its own set of codes that kinda sorta look like NAICS because they are 6 digits, but the IRS calls these “Business Activity Codes” (BAC) that you can find here: https://www.irs.gov/pub/irs-soi/18pf_business_codes.pdf. Now, there are 141 BAC that sort of correspond with some NAICS, but obviously not all with some of them are an exact match and many that are not present at all.
This can present an issue, especially (again) if you want to contract with the federal government or be considered for an SBA loan (like the PPP loans). I personally know of several PPP loans that were refused because the BAC and NAICS did not match and the BAC put them in a category of “other than small business” so they were ineligible for the loan. Unscrewing that during COVID was not particularly pretty, but they did get it done (so it can be done). If you have a few minutes, take a look at your tax records and see if that code is still the best code and if it isn’t, start the process with the IRS and good luck! (I really don’t know how to do it so check with your CPA)
I do know this though… NAICS matter with reference to your small business status with SBA – and it can be lethal for your federal competition (or your ability to compete). For once, two agencies (Census and SBA) are on the same page because the SBA has the exact same NAICS with corresponding dollar amounts or number of employees that delineate size standards for small businesses. This is critical and choosing the right NAICS (the one that is your Primary in SAM.gov) is the one that matters most.
Why this is really important: Federal contracts are often “set-aside” for “Small Business”. Every federal agency actually has goals for awarding to Small Businesses and that is based on the NAICS code federal contracting officers choose at the time of the solicitation/contract.
We will address the how and why procurement chooses NAICS later but for now, you really want to make sure that you choose the NAICS that gives you the most headroom for growth ie. So you can stay small in the eyes of the feds for as long as possible.
You can find the SBA Revenue and Employee Size Thresholds here: https://www.sba.gov/sites/default/files/2022-07/Table%20of%20Size%20Standards_Effective%20July%2014%202022_Final-508.pdf
Now that you know the threshold for your NAICS, you probably want to figure out how the feds right? This may be complicated when you get close to the threshholds but in most cases it is a pretty simple calculation. (although you will find that the SBA size standards are based on several factors and they do change. In fact, there is new information coming from SBA on 10/1/2022 - that is day one of FY2023).
For calculations, you can read about size standard calculation details here https://www.ecfr.gov/current/title-13/part-121 but for brevity (along with a disclaimer that I am not a lawyer and this is not legal advice) here is what matters…
Revenue Based Small Business Calculation: “annual receipts of a concern that has been in business for 5 or more completed fiscal years means the total receipts of the concern over its most recently completed 5 fiscal years divided by 5.” Simply put, the average of the last 5 years.
Number of Employee Based Small Business Calculation:
(1) The average number of employees of the concern is used (including the employees of its domestic and foreign affiliates) based upon numbers of employees for each of the pay periods for the preceding completed 24 calendar months.
(2) Part-time and temporary employees are counted the same as full-time employees.
(3) If a concern has not been in business for 24 months, the average number of employees is used for each of the pay periods during which it has been in business.
I have heard (hypothetically of course) that if companies can shoehorn themselves into an employee based NAICS it is hugely beneficial and you should do it because you can stay small and win billions of dollars and remain small.
Now I cannot recommend that this will work for you, but I can attest to it working because I know a client couldn’t compete for a contract in Defense Commissary Agency. You can see the difference here when you compare NAICS 493120 and 424480 and how Military Produce Group can book $1.7 Billion and be considered “small”.
I was bummed for my client but learned how NAICS worked I can tell you that so there is more to come on how to play the NAICS game.