All payments you issue to your employees should go through payroll as they are considered a form of taxable wages, including commissions, holiday bonuses, and even that ski pass or concert ticket you thought would be a nice thank-you gift. Exclusions apply for business reimbursement expenses assuming you can account for them with supporting receipts.
What’s the impact? The IRS puts the burden on employers to accurately withhold the proper payroll taxes from payments to employees, so beyond the penalties for late tax payments, headaches surrounding refiling returns, and sending out amended W2’s, you might be on the hook not just for the employer’s tax expense, but also for the employee’s tax portion. This is particularly true if you wait for your CPA to discover incorrect payments while preparing your income tax returns.
Suggestion: Scrutinize every payment to your employees before you sign those checks, create a reimbursement procedure to account for receipts, and review your vendor payment list quarterly to make sure you can account for all payments to employees not issued via payroll.