Expression of proteins inside cells is noisy, causing variability in protein concentration among identical cells. A central problem in cellular control is how cells cope with this inherent noise. Compartmentalization of proteins through phase separation has been suggested as a potential mechanism to reduce noise, but systematic studies to support this idea have been missing. In this study, we used a physical model that links noise in protein concentration to theory of phase separation to show that liquid droplets can effectively reduce noise. We provide experimental support for noise reduction by phase separation using engineered proteins that form liquid-like compartments in mammalian cells. Thus, phase separation can play an important role in biological signal processing and control.