Buffalo announced the one-year pact Tuesday.
A source told NFL Network that the contract extension is worth $4.5 million. Phillips, 26, had 19 tackles, three passes defensed and a fumble recovery in 12 games last season for the Bills.
The second round pick in the 2015 NFL Draft played his first three seasons for the Dolphins, before being waived Oct. 2. The Bills picked Phillips off of waivers. Phillips had five tackles, a sack and a pass defensed in four games for the Dolphins before leaving for Buffalo.
"Done deal," Phillips tweeted Tuesday. "Let's go Bills Mafia!"