The 55-year-old, who was appointed Town boss in 2012, will now remain at Portman Road until the summer of 2017.
McCarthy's previous deal was due to expire next summer.
The former Wolverhampton Wanderers boss guided the Suffolk club to ninth place in the Championship last season, which was their highest league finish for five years.
The Tractor Boys have confirmed that assistant manager Terry Connor has also put pen to paper on a new three-year contract.
Ipswich begin the Championship season at home to Fulham on August 9.