Collison played last season for the Los Angeles Clippers, averaging 11.4 points, 3.7 assists and 1.2 steals in 80 games.
Sacramento will be Collison's fourth team in the last four seasons after stops with the Dallas Mavericks, Indiana Pacers and New Orleans Hornets (now Pelicans). He was drafted by the Hornets in the first round of the 2009 NBA Draft.
The Kings' starting point guard last season Isaiah Thomas, who had a breakout campaign by averaging 20.3 points and 6.3 assists per game, is a restricted free agent.
The team extended a qualifying offer to Thomas last month, and can match any offer sheet that Thomas signs with another team. Signing Collison could be an indication the Kings don't plan on matching another team's potential offer to Thomas.
But according to Ken Berger of CBSSports.com, Sacramento would have room to match an offer sheet for Thomas if it uses the stretch provision to waive one of its current players.