The 30-year-old initially joined the Blades in February but made only three appearances after suffering a knee injury.
Phillips moved to City from Leeds United for £45m in 2022 and was part of the historic treble-winning squad in 2023.
The former England international has since fallen out of favour at the Etihad and will now look to revive his career at Bramall Lane.
"This was the move I wanted," Phillips told the club website.
"My time was spoiled by my last game and the injury after that so I'm here to put that right.
"The squad is similar to what it was last year, I'm happy to see everyone and I'm looking forward to coming back fighting fit.
“It is a good feeling to walk back through the doors in Shirecliffe, I see that the pre-season has been tough and the lads have come out flying so I'm happy to start training and get involved."