VoIP allows you to make calls over the internet, often without the use of additional onsite equipment aside from an internet router. VoIP is the next evolutionary step in the global exchange of information, replacing the antiquated landline phone with a digital, internet-based communications system.

Some instant messaging apps like Slack or Discord possess basic VoIP capabilities, but they aren’t considered VoIP clients because they can’t make a call to a traditional, wire-powered landline unit, which is how a lot of businesses continue to operate today.

The telecommunications market is currently offering two distinctive VoIP models: VoIP no contract and VoIP contract phone deals, each coming with its own set of pros and cons.

When you’re just getting started with a plan, the no-contract model can be more flexible and less expensive. However, you can absolutely get a great contract VoIP deal if you know what you’re looking for and where to find it.

In this guide, I’ll walk you through all the essential information you should know about VoiP before committing to a long-term contract so you can avoid common mistakes and save your business from costly frustrations.

1. VoIP taxes are passed on to the customer

VoIP services are generally subject to different tax regulations than most other B2B and B2C tools. The VoIP industry — similar to the telecommunications industry — faces more scrutiny, attention and regulation from lawmakers, resulting in higher fees and extra taxes.

The responsibility for a large number of these taxes trickles down to the customers. Depending on the type of VoIP plan you choose, this may lead to higher bills each month once all the fees are added up.

Taxes, surcharges and other VoIP service costs can vary between local, state and federal levels, and some of them may also change following updates, removals or addendums in existing tax regulations. Since your physical location determines the quantity and expense of the tax-related items on your account, it’s likely that the bill you receive will deviate from the listed prices.

Here are some of the most common taxes you’ll encounter on your VoIP bill.

Sales tax

Most U.S. states, with the exception of Delaware, Montana, New Hampshire, Oregon and Alaska, charge state and local sales tax. VoIP providers fall under the category of retail operators, so expect to be charged a retail sales tax depending on your area of residence and zip code.

Rarely, some operators may also charge you a business and occupation tax (B&O) because of additional levies (shipping revenue or number porting) imposed on them by a select number of states.

E911 surcharge

Also known as the E911 tax, this is a state-mandated fee used to support E911 services on state and local levels. It stands for enhanced 911, a telecommunications system that automatically sends the caller’s location to emergency operators.

As a VoIP customer, the E911 tax will reflect a combination of state and local fees in a single line on your bill, or, depending on your contract, some providers will further break it down into two separate lines (state and local) for a more itemized bill.

E911 service fee

This fee is associated with the operating costs incurred by the provider in administering the E911 tax to its user base, which is why it’s also referred to as the E911 cost recovery fee. The E911 service fee isn’t mandated by the government, meaning it’s a provider-imposed fee. Some providers may fully incorporate the E911 service fee into their monthly rate without dedicating a separate item line, with a total cost usually between $0.1 and $3 per month.

Federal Universal Service Fund (USF)

Most phone and VoIP providers are required by the Federal Communications Commission (FCC) to commit a certain revenue percentage to the Federal Universal Service Fund. The USF contribution is based on a fixed percentage of overall usage, or, in some cases, on a percentage of interstate usage instead.

The FCC does not endorse passing these fees onto customers, but it doesn’t forbid it either. Given that the required USF percentage increases almost every year, many vendors decide to include this fee in their monthly rates — thus effectively passing it on to customers.

Regulatory access fee

Similar to the E911 service fee, the regulatory access fee is not mandated by the government, but it’s an added cost providers use to cover their expenses to stay FCC-compliant. Additionally, this fee also covers USF costs in cases where the USF line item is omitted from your invoice.

The good news is that the regulatory access fee can sometimes be exactly zero. On the other hand, it can sometimes amount to hundreds of dollars, depending on your base VoIP plan.

Compliance and administrative cost recovery fee

This fee sounds like it should be managed under the regulatory access fee, but it’s not. The compliance and administrative cost recovery fee is used by some vendors to offset expenses associated with protecting or acquiring new intellectual property, as well as to cover legal filings on federal, state and local levels.

Federal Telecommunications Relay Service fee

All VoIP providers are subject to the federal telecommunications relay service fee, with limited exceptions. The TRS funds services and technology that allow people with speech or hearing disabilities to receive and make phone calls. Again, the FCC allows providers to pass TRS onto their customer base, and many do.

Local utility users tax

This tax can vary on a local, regional or state level, which means its appearance on your bill is tied to your registered location in the U.S. It usually varies between 0 and 11% of the total amount you pay for service fees.

Additional state taxes

Besides being responsible for following the federal tax mandate, VoIP providers are also inundated with a litany of different state-based taxes that make it difficult to comply without offloading some responsibility to the end user. This is one of the reasons why you may come across line items such as excise tax, gross receipts tax and district tax on your invoice.

Finding more than five line items in your invoice is fairly normal and is considered reasonable by most customers as long as VoIP providers aren’t charging for something that isn’t mandated by law or essential for uninterrupted operations.

All of these little costs can add up fairly quickly, which isn’t something you’d want to discover for the first time on your initial VoIP bill.

2. Customer support promises may differ from reality

Before entering into a contract with a VoIP provider, you’re likely to be offered excellent customer service, timely support and robust troubleshooting advice. Once you’re locked in, those promises might amount to a merely passable version of expectations that could sour your overall experience and make you wary of such contracts in the future.

The explanation for this phenomenon is simple — once you sign on the dotted line, you’re making an administrative promise that is difficult to get out of. The penalty for breaking a contract often outweighs the benefits you’ll get from it, so it’s essential to do your due diligence before committing to a VoIP service for the long haul.

Research customer reviews of how well a VoIP provider handles issues such as dropped calls, inconsistent call quality or bad connection and how quickly and effectively these issues are resolved. Current and former customers will help you see the big picture of whether or not a company is able to deliver on the promises in their marketing materials.

3. Free alternatives can be more enticing than VoIP contracts

If you’re a flexible startup or a business looking to experiment with new options to cut costs, you might want to consider free alternatives in place of a long-term VoIP contract.

Chat apps like Slack and Discord can mimic VoIP capabilities for free. Discord, specifically, can be used even if it’s not connected to a router. If you travel often, you can use Discord on your smartphone to communicate with other Discord users over local Wi-Fi, like safely latching onto an official internet connection provided by a hotel, an airport or your favorite cafe.

One of the downsides of these free chat clients is that you can’t scale large business operations through them, as you can with professional VoIP services. However, if you know you’re looking to grow, you can try integrating a free VoIP-capable chatting app with your existing communications infrastructure to test if that’s something you’d pursue as a long-term solution.

Plus, most VoIP providers offer some sort of free trial or demo, so be on the lookout for those offers as a way to test a full-scale solution before signing a contract.

4. VoIP isn’t always 100% reliable

Despite sounding like a technologically advanced solution, VoIP contract deals also come with a few drawbacks you should know about before agreeing to an extended VoIP plan. These drawbacks are usually related to reliability, power dependency and security.

Reliability

VoIP is heavily dependent on internet connectivity, which means things like jitter, latency and packet loss can significantly muddle the call quality — particularly in places with poor internet service.

To avoid getting stuck with an unreliable VoIP provider, consider looking for a plan that offers a dedicated network for VoIP traffic and advanced quality of service configuration that assigns high priority to incoming and outgoing voice traffic.

Power dependency

VoIP infrastructure requires power to function, which can be detrimental during an outage. Traditional phone lines, on the other hand, do not. The latter is powered by the telephone exchange, which has grid-independent backup power capabilities, usually in the form of battery clusters that can last up to 64 hours — if not more.

You can manage this risk by connecting your VoIP system to an uninterruptible power supply to keep routers, switches and other hardware operational during short-term power outages.

Security

Internet technology, including VoIP, is highly susceptible to external threats such as spamming, breaching or denial-of-service attacks. This can impede your day-to-day operations and seriously endanger existing sensitive business communications across the entire company.

Fortunately, you can prevent most of it by leveraging high-end security protocols, including two-factor authentication (2FA) and end-to-end encryption (E2EE) to safeguard your VoIP system against malicious actors. With that being said, nothing is 100% secure, so make sure you’ve got a backup plan in the event that attackers manage to breach your defensive line.

5. Equipment compatibility issues are common

After the basics of power, internet connection and a service plan, setting up a VoIP system requires two major things: software and compatible equipment to run it. If you opt for on-premise software solutions, you’ll need a dedicated server to support your IT infrastructure, which comes at an extra cost compared to something like a hosted software plan.

For example, in something like a cloud-based contact center solution, a third-party vendor provides the server and other equipment, while you gain access to it through the cloud. It’s a cost-effective solution that scales up or down depending on the performance of your business, and it takes up less space because the hardware is housed by the vendor.

Here’s a list of some common VoIP equipment and what it does:

• Channel bank: A device that converts analog phone signals into digital signals compatible with the internet.
• Ethernet cable: A type of cable required by most VoIP-compatible phones to operate.
• Analog telephone adapter: Also known as an FXS gateway, this device converts analog phones into VoIP-capable hardware.
• IP phone: Also referred to as a VoIP phone, this device is capable of making and receiving calls over an IP network using a high-speed internet connection.
• UPS: A battery that acts as a backup power.
• Power-over-Internet adapter: A device that physically powers an ethernet cable.
• VoIP headset: Specialized headphones with a microphone that allow for hands-free calling.
• VoIP router: A device that connects VoIP-capable equipment to the internet, using data packets to pass and sort out internet traffic.

Housing the equipment on company premises isn’t necessarily an issue, but if you order equipment that’s incompatible with the VoIP software you’re planning to use, it could cost you additional time and money to replace the components.

The best way to avoid equipment problems impacting business operations is to buy everything from the same vendor, preferably one with a proven track record such as Cisco, Jabra or Adtran. Also, make sure the new devices are compatible with your existing IT infrastructure and fully compliant with your local power requirements to avoid unpredictable hardware hiccups down the road.

6. VoIP gateways can be more cost-effective than long-term VoIP contracts

Switching to a VoIP contract can be very expensive if you’re still actively operating under a legacy phone network. To avoid putting a major dent in your budget, consider using VoIP gateways with your current phone setup, and, for an even more cost-effective solution, think about upgrading your telecommunications hub little by little instead of all at once.

A VoIP gateway is a device that converts analog phone signals into digital data packets that can then be transmitted over IP networks on the internet. It also works in the other direction to convert digital signals from the IP network into analog signals compatible with a traditional landline calling device.

VoIP gateways are a game-changer for businesses looking to utilize the VoIP ecosystem without spending a lot of money on equipment, consultation, installation and maintenance of VoIP-compatible hardware. Plus, one VoIP device can handle up to 256 calls at any one time, which is more than enough to cover the telecommunications requirements of startups, medium-sized businesses, smaller calling centers or professional individuals whose occupations require frequently using the phone.

If this sounds like a solution you’d like to explore before signing a VoIP contract, look for devices that support call routing, firewall, secure shell security, high-bandwidth internet traffic, adaptive jitter buffering and echo cancellation.

7. SIP trunking can be more cost-effective than VoIP gateways

Session Initiation Protocol trunking is a digital method of receiving and making calls and other media over the internet. In my opinion, SIP trunking is heavily underutilized since it’s more flexible than a typical VoIP contract, more powerful than a traditional phone line and more recent than the technology VoIP gateways are based on.

Taking all these things into consideration, SIP trunking can be more cost-effective than VoIP contracts and VoIP gateways combined. It can cost anywhere between $15 and $25 monthly per SIP trunk.

However, and this is a big deal, you can only use it if your existing phone system is compatible with SIP trunking. If you’re still running an older phone system, you may need to install a VoIP gateway to enable seamless interoperability between your devices.