Terms of the deal weren't revealed by Phillips or the team, but The Cincinnati Enquirer reported the dollar amount and said Phillips will be with the Reds through 2017.
The signing came shortly after the Reds inked first baseman Joey Votto to a 10-year, $225 million contract.
Part of the deal was a restructuring of the $12.5 million option Phillips was playing under this season.
"I'm not going to lie to you. This is probably the first time I've ever been nervous," Phillips said at a news conference in Cincinnati. "I cried about this. This is where I wanted to be."
The 30-year-old infielder is in his seventh season with the Reds after being acquired from Cleveland in 2006.
The two-time all-star and three-time Gold Glove winner is a career .272 hitter with 130 homers, 524 RBI and 202 doubles in 1,045 games.