If you provide bonuses, awards, gifts or prizes to employees or customers, it’s important to understand the tax consequences. It’s particularly important if the recipient is going to have to pay a tax – you’ll want them to understand this fact from the start, so they don’t get an unpleasant surprise later.

In general, any gifts made by a company to an employee are considered wages. They’re subject to both employment tax and income tax, and must be reported on an employee’s W-2 form.

Certain very minor forms of compensation are usually considered “perks” rather than wages. For instance, if a business allows its employees use its copying machines for personal purposes for free, that’s a perk. But if you give an employee cash (or a cash equivalent), that’s always considered wages, even if the amount is de minimis. So if you give an employee a $10 Starbucks gift card as a thank-you for working late, the $10 is considered taxable.

Stock options are also taxable, and can be subject to complex rules. It’s a good idea to explain these rules to employees who may be receiving options for the first time, since it’s possible for employees to make big mistakes and end up resenting the employer. (There have been cases where workers ended up owing more in taxes than they received from selling their stock.)

One exception to the general rule is employee achievement awards, which can sometimes be considered non-taxable – but there are strict limits.

In general, to be tax-free, the award must be a tangible thing (not cash or a gift certificate) given for safety or for length of service at a meaningful ceremony. If it’s a safety award, it can’t be given to a manager, professional or clerical employee, and no more than 10% of your employees can receive the award. If it’s a length-of-service award, the employee must have worked there at least five years and not have received a similar award within the past four years. The tax-free amount is limited to $1,600.

In theory, it’s possible that a gift from a business owner to an employee could be a purely personal gift and not a form of compensation. But according to the U.S. Tax Court, you’d have to establish that the gift “is completely unrelated to the employment relationship and reflects no expectation of a business benefit.” That’s a tough thing to prove, and it seldom works.

Gifts to vendors, suppliers and customers have their own rules.

In general, “thank-you” gifts are deductible by a business up to $25 per person. The $25 figure includes “indirect” gifts to someone (such as a gift made to his or her spouse).

Gifts of this sort are typically not considered taxable income to the recipient. However, if a gift is large enough and related closely enough to business dealings, there might be an exception.

For instance, in one case the president of a metals company gave the president of another company some extremely valuable sales leads. The other president responded by giving the first president a car.

The first president didn’t report the value of the car as income, because he considered it a gift. But the U.S. Supreme Court ruled that the value of the car was subject to income tax because it wasn’t really just a present; it was a repayment for the sales leads and an inducement to provide additional leads.