The 22-year-old has made 38 appearances for the Owls this season both in the right-back and midfield positions, and despite being out of contract in the summer, Palmer is now officially back in the Championship side.
The midfielder spent last season on loan at Tranmere Rovers and made 47 appearances for the Championship side but Palmer is thrilled to be staying and developing his football career with Sheffield Wednesday.
"I'm delighted to sign and it is put to bed. It's been in the pipeline for a while and Sheffield Wednesday is where I want to be," Palmer said.
"This is a massive club hopefully going places and I want to be part of that.
"It's important to me to know where I am and to have that continuity.
"Now I just want to continue my progress and go from strength to strength."