Businesses that accept payments from customers must be aware of NAICS, MCC and SIC codes. These codes can affect:
- How the Internal Revenue Service (IRS) classifies a business
- Tax payments
- Interchange rates
First, What Are NAICS, MCC and SIC Codes?
Here’s a closer look at what exactly NAICS, MCC and SIC codes are and how they impact your business:
- MCC stands for Merchant Category Classification, the code for which is a four-digit number used by the credit card industry to classify businesses into market segments.
- SIC stands for Standard Industrial Classification, the code for which is another four-digit number. The code was used by the U.S. Office of Management and Budget and other U.S. statistical agencies. With SIC codes, all forms of industry and services were grouped into 10 divisions. The first two digits signified the broad division category, while the industry group and type were represented by the last two digits.
- NAICS stands for North American Industry Classification System (NAICS). According to the United States Census Bureau, the SIC was replaced by NAICS in 1997. The NAICS system classifies economic activity into 20 industry sectors, including 15 services sectors and 5 goods-producing sectors. NAICS codes consist of six digits, which represent the main business sector, the subsector, the industry group, the specific industry and the country-specific number (for U.S., Canada or Mexico).
Why Are MCC Codes Important to Businesses?
Depending on the MCC code a business has, it may be able to report certain payments on a Form 1099-MISC come tax time. For example, businesses selling merchandise may not be able to report a certain payment, but businesses selling a service may be able to. If a business sells both products and services, generally the MCC code will reflect the business type that takes up the dominant percentage of business. MCC codes are issued by credit card brands.
MCC codes affect businesses in other ways. Some credit card companies will use MCC codes to determine risk measurement. For example, airlines and pawn shops may be considered higher risk businesses, which may affect transaction rates and fees.
Also, in order for businesses to accept certain types of payments, such as a healthcare business that wants to accept payment from a health savings account, the business must have a certain MCC code.
For credit card companies like Visa and Mastercard, interchange fee qualification is influenced by MCC codes. For example, businesses classified as schools may qualify for lower interchange fees than other businesses. For some credit card processors and businesses, the MCC code may change the fee, but not necessarily lower it.
MCC codes are important for your business, and your consumers may even benefit from your MCC code. For example, some credit cards offer cash back for certain types of businesses, like grocery stores or gas stations. By securing the right MCC code, your customers could get rewarded and spend more at your business.
How Are SIC Codes Used?
SIC codes were first recommended and developed in the 1930s and were last updated in 1987 by the Office of Management and Budget. The NAICS, with codes replacing SIC codes, was developed with statistical agencies in Mexico and Canada to enable comparability of business statistics throughout North America. Unlike SIC codes, which are four digits, NAICS codes are six digits. There will be no further revisions of the SIC.
However, the SIC is still widely used to designate business classifications and for non-statistical purposes. The United States Department of Labor, Occupational Safety and Health Administration, continues to list SIC codes. However, for federal economic study applications including collection, tabulation, presentation and analysis of economic statistics, NAICS is used.
Many businesses today still use SIC codes to target companies for marketing. By searching for companies under a certain SIC code, for example, a business can create a list of target clients. Some businesses use NAICS business lists for the same marketing purposes, or a combination of the two. SIC codes are not directly convertible to NAICS codes. A business that had one SIC code may fall into a completely different type of category in the NAICS system.
How Are NAICS Codes Used?
In addition to being used for statistical purposes, NAICS codes are also used for non-statistical purposes, such as taxation, contracting, administration and regulation purposes. For example, some governments at the state level will offer tax incentives to companies with certain NAICS codes. Companies seeking government contracting will need to have the relevant NAICS code.
NAICS codes are self-assigned or may be assigned by various agencies or the U.S. Census Bureau. For example, a business may find their NAICS code on a form from the Occupational Safety and Health Administration.
If a business has been assigned an NAICS code that they believe should be changed, the business can contact the agency that assigned the code. NAICS codes are reviewed every five years, with the next potential revision in 2022.
Use NAICS, MCC and SIC Codes to Your Advantage
NAICS, MCC and SIC codes offer insights into the type of business a company runs. If your business is considering potential clients or wants to target a certain market, you can use these classifications to refine your targets.
In addition, making sure your business has the most accurate classification is good for your company. As noted above, you may be eligible for lower interchange fees or tax incentives, and you may gain the ability to accept certain types of payments. Have questions about NAICS, MCC and SIC codes? Payment Solution Pros is here to help. Contact us.