What Is the NAICS Code for Multi-Level Marketing?

Businesses in the United States are classified using the North American Industry Classification System (NAICS), which helps government agencies track economic activity. Multi-level marketing (MLM) companies, which rely on independent distributors to sell products, fall under specific NAICS codes that distinguish them from traditional retail or wholesale businesses.

Finding the correct NAICS code for an MLM business is essential for tax reporting, regulatory compliance, and industry analysis. Proper classification ensures business owners meet legal requirements and accurately report financial data.

Criteria for Direct Sales Classification

A business falls under direct sales in the NAICS system if it operates without a fixed retail location and relies on independent representatives to sell products. Unlike traditional retail stores, direct sales businesses use in-person marketing, online platforms, or social networks instead of walk-in customers.

Compensation structure is another key factor. Direct sales businesses typically use commission-based earnings, where independent sellers receive a percentage of sales rather than a fixed salary. In MLM models, this extends further, allowing participants to earn commissions from the sales of individuals they recruit.

The type of products sold also plays a role in classification. Direct sales companies often offer consumer goods such as cosmetics, dietary supplements, or household items, marketed through personal demonstrations, home parties, or digital platforms. Unlike traditional retail, which depends on corporate websites or physical stores, direct sales rely on interpersonal relationships and direct outreach.

Methods to Locate the Appropriate Code

Identifying the correct NAICS code for an MLM business involves reviewing official resources and comparing business activities to existing classifications. Selecting the most accurate category ensures compliance with government requirements.

Searching Official Resources

The U.S. Census Bureau maintains the official NAICS code database, accessible through its website. The NAICS Search Tool allows users to enter keywords related to their business activities and find relevant classifications. Searching terms like “direct selling,” “network marketing,” or “multi-level marketing” can yield applicable codes.

The most commonly used NAICS code for MLM companies is 454390 – Other Direct Selling Establishments. This category includes businesses that sell products directly to consumers outside of traditional retail locations, such as door-to-door sales, home parties, and online platforms.

If a business primarily sells nutritional supplements or health-related products, it may also need to reference codes related to health product sales. Reviewing the full NAICS manual entry for 454390 ensures the classification is appropriate.

Comparing Business Activities

To determine the most suitable NAICS code, business owners should compare their company’s structure and sales methods to the NAICS descriptions. Since MLM companies operate differently from traditional retailers, they must ensure their classification reflects their direct selling model.

A key consideration is the revenue model. If a company generates income primarily through independent distributors who earn commissions on sales, it aligns with direct selling. Additionally, if the business lacks a physical storefront and relies on personal networks, online marketing, or in-home demonstrations, it further supports classification under 454390.

Some MLM businesses may have hybrid models that include both direct sales and e-commerce. In such cases, they should assess which revenue stream is dominant. If more than half of sales come from independent representatives rather than direct online purchases, the business should classify itself as a direct selling establishment.

Confirming with Federal Databases

Once a business has identified a potential NAICS code, it is advisable to confirm its accuracy by checking federal databases used by agencies such as the Internal Revenue Service (IRS) and the Small Business Administration (SBA). These organizations use NAICS codes to determine tax deductions, business loans, and industry-specific regulations.

The IRS does not assign NAICS codes but requires businesses to report them on tax filings, such as Form 1120 (U.S. Corporation Income Tax Return) or Schedule C (Profit or Loss from Business) for sole proprietors. Using an incorrect code could lead to misclassification, affecting tax treatment or eligibility for deductions.

The SBA references NAICS codes when determining small business size standards, which impact loan qualifications and government contracting opportunities. Businesses classified under 454390 must meet specific revenue thresholds to qualify as a small business. As of 2024, the SBA defines small businesses in this category as those with annual receipts of $9 million or less.

Verifying the selected NAICS code with these databases ensures consistency across financial records. If there is uncertainty, consulting a tax professional or accountant can help confirm the correct classification before submitting official documents.

Applying the Code in Financial Records

Once the correct NAICS code is determined, it must be accurately incorporated into financial records for tax reporting, accounting, and regulatory filings. Proper classification ensures financial statements reflect the business’s operational model, which can impact expense categorization, revenue recognition, and eligibility for deductions.

When preparing financial statements, the NAICS code should be included in business tax filings such as Form 1065 (Partnership Return of Income) or Form 1120-S (S Corporation Income Tax Return), depending on the entity structure. Lenders and investors use NAICS codes to compare profit margins and cost structures within an industry. A direct selling business may report higher commission expenses relative to traditional retailers, which should be clearly documented.

Expense tracking is also affected by this classification, particularly in areas such as 1099-NEC (Nonemployee Compensation) reporting. Since MLM businesses compensate independent distributors rather than salaried employees, payments exceeding $600 annually to any individual must be reported to the IRS. Misclassifying these payments could lead to compliance issues. Businesses can also deduct expenses related to distributor training, marketing materials, and product samples, provided these are properly recorded.

Sales tax treatment varies depending on how an MLM business operates. Some states require direct sellers to collect and remit sales tax, while others impose tax obligations on individual distributors instead. The NAICS classification can influence how state tax agencies assess these obligations. States like California and Texas have specific tax policies for direct sellers that determine whether sales tax is collected at the corporate or distributor level. Businesses should maintain detailed records of sales transactions, including tax-exempt purchases and resale certificates, to ensure compliance.

Addressing Questions with Tax Authorities

When dealing with tax authorities, MLM businesses must be prepared to justify their classification, deductions, and reporting methods in accordance with federal and state regulations. Agencies such as the IRS and state tax departments may request documentation to verify compliance, particularly when a business structure involves independent distributors.

One common area of scrutiny is how income is characterized for tax purposes. The IRS may question whether payments to distributors should be classified as independent contractor income or if certain relationships resemble employer-employee arrangements. This distinction affects payroll tax obligations under 26 U.S. Code 3401 and determines whether the company must withhold Social Security and Medicare taxes under FICA regulations. Misclassification can lead to financial penalties and interest on unpaid taxes. Maintaining clear contracts and demonstrating compliance with IRS Common Law Rules—which assess behavioral control, financial control, and the nature of the relationship—can help businesses substantiate their classification.

Deductions related to business expenses may also trigger inquiries, especially if the IRS suspects that personal expenses are being claimed as business write-offs. MLM businesses often incur costs for travel, promotional materials, and training events, but these must meet the ordinary and necessary business expense criteria under 26 U.S. Code 162. For example, attending an industry conference in another state may be deductible, but a personal vacation combined with a business event could be partially disallowed. Keeping detailed records, such as receipts, mileage logs, and documentation of business purposes, is essential to substantiate these deductions in the event of an audit.

State tax authorities may raise concerns regarding sales tax collection and nexus rules, particularly if distributors operate across multiple states. Some states apply economic nexus thresholds, meaning businesses that exceed a certain sales volume in a jurisdiction must register for sales tax, even without a physical presence. Under South Dakota v. Wayfair, Inc. (2018), states can require businesses to collect sales tax if they exceed $100,000 in sales or 200 transactions annually within that state. MLM companies must monitor distributor activities and ensure compliance with varying state sales tax laws to avoid unexpected liabilities.