What Is VoIP & How Does It Work?

June 23, 2022 | 10 min read

What is VoIP? How Does VoIP Work? Learn Everything You Need About Voice over IP.

VoIP is an acronym for Voice over Internet Protocol and is a technology that allows you to make and receive phone calls and video calls over the internet instead of landlines.

Most people consider VoIP the alternative to the local telephone company.

VoIP uses your existing internet connection.
VoIP uses your existing internet connection.

If you have an internet connection, you can call anyone without the need for traditional, local phone service or physical copper wires. All you need is high-speed internet and a VoIP service provider to handle the calls.

A trusted VoIP provider can handle everything for you. Plug your IP phone in, and you’re done. These digital phones use your high-speed internet connection to establish connectivity.

VoIP converts your phone calls into data that is sent over the internet. You can use the Ethernet cables or skip them if you have a strong Wi-Fi signal. It does so at a much lower cost than older telephone systems. Voice over IP has many advantages over traditional phone service. 

What is the difference between VoIP and landline phones?

The main difference between VoIP phones and landline phones is that a landline phone is hardwired into a physical location using copper wires.  A VoIP phone, on the other hand, makes and receives calls over the internet and is not bound to a specific location. 

Traditional telephones use analog lines to carry voice signals. If you want to make calls, you have to have extra wiring installed.

FunctionalityVoIP phonesLandline phones
Phone calls (PSTN)YesYes
Nationwide long-distanceIncludedOptional
User-to-user callsYesPBX required
Caller IDYesYes
Call WaitingYesYes
Ease of setup★★★★★★★★
Requires internetYes, 100 Kbps per lineNo
WirelessWi-Fi, DECT, and Bluetooth headsets availableDECT and Bluetooth headsets available
Reliability during internet/ power outagesCalls can be routed to another number or voicemail.Calls drop or are routed to voicemail.
TechnologyIP telephony (SIP, TLS, and SRTP)Analog voice signals
Call quality★★★★★★★★★
Setup cost$0$110 per jack
Monthly cost$20–35$35
Advanced features
Auto attendantIncludedPBX required
Phone number privacyIncludedVaries
Phone number changesIncluded$27
Phone extensions & hunt groupsIncludedPBX required
ConferencingIncludedThree-Way Calling
Call routingIncluded$9.95/mo
Call queuingAdd-onAdd-on
Remote work capableYes, softphone appsCall forwarding
Call encryptionYes (TLS & SRTP)No
International dialingMX: $0.16/minUK: $0.01/minJP: $0.05/minMX: $1.97/minUK: $1.21/minJP: $1.62/min
Business voicemailIncluded$13.95/mo
Integrations (CRM, text messaging, surveys)YesNo
Sources: VoIP information based on Nextiva’s business phone plans. Analog information is based on business rates published in ILEC tariffs for Arizona. Updated on January 20, 2021.

If you want to know more about how VoIP compares to landlines, check out our comprehensive comparison.

How does VoIP work?

Voice over IP converts your voice to a digital file, compresses it, and sends it over the internet. The VoIP service provider (much like your internet service provider) sets up the call. Many people choose VoIP over traditional landlines because there is less startup cost involved and they can make calls using the internet, which saves them money on long-distance charges. 

Voice over IP uses Internet Protocol, an essential building block of the internet. IP telephony is a massive innovation from the century-old telecommunications system.

For phone calls, the conversation is exchanged using small data packets. The internet can send these data packets around the world in less than a second. For internet telephony, these packets travel between your phone and a VoIP provider.


A VoIP phone system facilitates calls between other phones or over to another telephone company. It also provides other useful functions like voicemail, call forwarding, call recording, and more.

In four steps, here’s how VoIP works.

  1. Your phone connects to your switch or router in your Local Area Network (LAN).
  2. When you dial a telephone number, your IP phone tells your VoIP service provider to call the other party.
  3. Your VoIP service establishes the call and exchanges data packets from your IP phone.
  4. Your VoIP phone converts these digital signals back into the sound you can hear.

Voice over Internet Protocol bypasses the telephone company entirely. Wherever you have a broadband internet connection, you can use VoIP. It’s a significant upgrade from an analog phone system.


You used to need expensive, proprietary equipment to use VoIP — but that was over 20 years ago! Today, VoIP is built upon open standards such as Session Initiation Protocol (SIP). SIP provides complete interoperability between different desk phones, conference phones, and VoIP apps.


Cloud-based PBXs are responsible for features like voicemail, conferencing, and call routing. When you think about it, they act as their own full-service phone companies that you control.


All you need is a broadband internet connection (cable, DSL, or fiber) and you can reap all the benefits of VoIP.

Benefits of VoIP

  1. Lower cost – Many consumers and businesses alike have realized substantial cost savings and lowered their phone bills by over 60%.
  2. High-quality sound – There’s a noticeable difference in the call quality, so the audio isn’t muffled or fuzzy.
  3. Advanced features – Leverage premium features to run your company such as auto attendants, call recording, and call queues. They’re often included with business phone service plans.
  4. Call anyone worldwide – International long distance rates are as low as $0.04 per minute to call Mexico or $0.01 to reach the United Kingdom.
  5. Business phone numbers for a remote work team – Use your phone service wherever you work. No technical setup is necessary if you work from home. The good news is that VoIP desk phones aren’t expensive, and you can even get them for free from your VoIP service provider. Plus, providers include a mobile app that you can use on your desktop or mobile device to make calls instead of using a traditional handset.
VoIP setup is easy as plugging in two wires.

Top VoIP phone system features

What are the attractive features available with a cloud-based office phone system? Here are the most popular VoIP features that businesses will enjoy using.

These business phone features will matter more or less depending on your needs.

1) Auto attendant

Project a professional image with a phone menu that greets incoming calls. If you’ve called a company and had to press 1 for sales, 2 for support, you’ve used an auto attendant.

An auto attendant helps you direct callers to the right person or department. You can forward calls to your voicemail or elsewhere outside of business hours.

2) Mobile and desktop apps

With cloud communications, you won’t miss calls because you’re not in the office. Several VoIP service providers now offer an app for your computer and mobile device.

It’s more important than ever to equip your team with a VoIP solution to work from home. These apps let you make phone calls, join conference calls, exchange text messages, and more.

You can use these telecommunications apps with or without a separate desk phone. It’s your choice.

3) HD call quality

There’s almost nothing worse than asking callers to repeat themselves. HD Voice increases the sound quality in your phone calls. This VoIP technology makes phone calls sound twice as clear as a standard phone call.

For even fuller sound, many VoIP headsets and phones provide noise-canceling capabilities. This high-definition sound quality is noticeable even for long-distance calls.

4) Unified Communications

VoIP elevates your team’s workflow through a concept known as Unified Communications (UC). Instead of using several disparate apps, your company’s communications platform is fully integrated.

It’s now even easier for employees to connect with each other and with customers. You can even flip calls between mobile devices, too.

Your team gets work done faster by meeting over video and screen sharing. UC makes real-time communication intuitive and well-organized.

Here are some of the key functions within a UC platform:

  • Instant messaging
  • Team chats
  • Video meetings
  • Screen sharing
  • Conference calling
  • Mobile and desktop apps

5) Call encryption and VoIP security

VoIP security is top of mind for business owners. Telephone calls carry confidential information like credit card numbers and HR conversations. You must protect these assets, or it could cost you.

VoIP is safe and secure even as data packets travel through the internet. IP phone systems have built-in security to stop bad actors from tapping your calls.

Ask your VoIP service provider about call encryption. VoIP technologies like TLS and SRTP scramble call data making eavesdropping near impossible.

You should consider whether a VoIP provider is accredited and meets industry standards. It’s handy to have a requirements checklist when selecting a business phone service.

Useful questions to ask include:

  • Are they accredited in PCI, SOC 2, ISO/IEC 27001?
  • How many data centers do they have?
  • What is the uptime of their VoIP service?
  • Do they provide HIPAA compliant IP telephony?
  • Can you access real-time call logs?

Related: An In-Depth Look at VoIP Security & Call Encryption

6) Call recording

Leverage your phone system to record phone calls between customers and your staff. Is your team handling calls with care and precision?

Recording calls through your phone system reveals areas for your team to improve. Plus, it’s secure, so only authorized personnel can access it.

The advantage of VoIP call recording is that it’s undetectable to all parties. It also requires no extra hardware, unlike landline PBX systems. Goodbye, cassette recorders!

Related: 40+ Best VoIP Features Your Business Can’t Do Without

How much does VoIP cost?

VoIP is surprisingly inexpensive when you consider all its capabilities. The short answer is that you can expect to pay approximately $35 per user per month for VoIP. The cost savings are quite dramatic compared to a traditional phone system or on-premises PBX.

To give you an idea, here’s how much VoIP typically costs:

  • Initial costs: $0-$50 per line
  • Monthly costs: $19-$45 per line
  • Device costs: $80-$600 per IP phone
  • International calls: $0.01+ per minute
  • Taxes and fees: Varies based on your city, county, and state.

Traditional phone systems have hidden costs you might not expect:

  • Installation fees: $50-100 per drop
  • Deposit: $100-$500
  • Maintenance contact: $1000+ annually
  • International calls: $1.00+ per minute
  • Hard pull credit check

All this is to say that we strongly recommend you obtain a free quote to confirm the exact VoIP pricing.

How to choose a VoIP provider

Once you have an idea of your VoIP features and requirements, look for a service provider that fits your budget and can grow with you. Take into consideration customer reviews, availability of live help, and documentation.

Here are several qualities to look for in a VoIP phone service provider:

  • Proven reliability with minimal downtime
  • Compatible with your network
  • Live support available 24/7
  • Multiple, redundant data centers
  • No-pressure sales experience
  • Optional professional services
  • Examples of clients in a similar industry

When you’re in discussion with a VoIP provider, ask about the available specials. You could be eligible for a free business VoIP phone or a hefty discount, depending on your commitment.

For most people, VoIP is the clear winner over analog landlines. VoIP offers the best value, cost savings, and the most useful features.

When you switch to VoIP, you won’t even think about your old phone service. You could save up to 65% off your business phone bill.

What VoIP equipment do I need? 

When you switch to VoIP phones, you have two options for VoIP equipment – hard phones or softphones. 

A hard-ware based VoIP phone looks just like the traditional “desk phone” you’re used to, but it connects to your internet modem in order to make a call. 

A VoIP softphone is a software-based phone that is installed on your computer. You will use your computer software to make and receive calls, just like you would on any phone, except the keypad is operated through the software. 

You can use the software-based VoIP phone through your computer speakers and microphone, or you can get headset equipment that is designed to work efficiently with VoIP. Some people find that headset equipment allows for better sound quality while still allowing you to be hands-free on your computer. 

Most VoIP providers will give you a few choices for the VoIP equipment you need. For example, Nextiva allows you to BYOD (bring your own device), rent a desktop phone or conference phone from us, or use the included app that you can use to make calls from a computer or mobile phone. 

History of VoIP

VoIP was developed in 1995 by a company called VocalTec. The first VoIP calls were made using computer software only, no hard desk phones. A few years later, VocalTech released digital voicemail applications and functionality for computer-to-telephone calls and phone-to-phone calling. 

By 1999, more companies entered the market, and a company named Asterisk created the first IP-PBX that became popular because it was an open source program. 

Today’s VoIP is heavily used in business communication to help power everything from large call centers to individual business phone numbers so employees can take calls from anywhere. 

VoIP has become a critical, cost-effective way to help remote staff  and outside sales staff to take business calls from anywhere using a VoIP app for their smartphone. Added bonus? They can keep their personal phone number and business phone number separate, but still use the same device.  

FAQs about VoIP

1. Is it easy to use VoIP?

The truth is that VoIP is easy to set up and to use for everyday personal and business calling. As long as you have a working internet connection, you can enjoy making calls over the internet.

Unlike proprietary calling apps like Skype or WhatsApp, you can call any phone number. You can use your VoIP service to call anyone using telephone companies like AT&T, Verizon, and T-Mobile. They won’t even know the difference, other than the improved call quality.

As far as setup is concerned, you don’t have to do anything technical. If you can plug in a power cord in the wall and a network cable to your phone, you can use VoIP. Follow this handy guide on how to set up your business phone service.

It’s even easier to use your VoIP phone service on your iPhone or Android. Download a free VoIP app, sign in, and you’re ready to make calls using VoIP.

2) Are there any must-have analog phones?

You can always replace traditional phones with affordable IP phones. However, there are the few that like their fax machine or phone they’ve used for years.

To use an existing analog phone with VoIP, you’ll need an Analog Telephone Adapter (ATA). These are pretty straightforward in how they function. They retrofit these older devices to send digital data over the internet.

3) Is VoIP Reliable?

In the early days of Voice over IP, the call quality was inconsistent. Sometimes calls dropped, and delays were common. As internet bandwidth increased, VoIP call quality has improved dramatically.

VoIP calls sound more crisp and clear as compared to a landline phone. However, this will depend on your internet service provider. The SIP protocol itself allows for error-correction protocols like TCP or UDP. It’s your choice.

Did you know that you can have your cloud PBX provider forward calls to your cell phone if you’re not available? This redundancy is a perfect way to stay online during a power outage.

4. Is VoIP an application software?

VoIP on its own is not limited to application software. However, a mobile app is certainly a benefit of VoIP because you can take and make calls from anywhere without being bound to your deskphone. VoIP gives the flexibility of choosing to have a hard phone, a software-based phone, or both!

5. Can a VoIP number be used for fax?

Yes! Nextiva allows you to send and receive unlimited faxes using your VoIP phone system. Read more about faxing with VoIP on Nextiva. 

6. Are VoIP apps safe to use?

Great question! Be sure to look into the safety protocols of the VoIP provider that you are considering. For example, Nextiva’s network comes with 24/7 monitoring and security. And every Nextiva data center meets the security standards set by the ISO/IEC 27001 certification. Read more about Nextiva’s security measures here

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Blair Williamson

ABOUT THE AUTHOR

Blair Williamson

Blair Williamson is a Sr. Content Marketing Manager at Nextiva. Her background is marketing in higher education and tech. She geeks out on WordPress, kettlebells, and whatever book she's currently reading.

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