The 22-year-old academy graduate has surged into the first team this season, making 38 appearances in all competitions in both midfield and defence.
"I'm delighted to sign and it is put to bed," he told the club website. "It's been in the pipeline for a while and Sheffield Wednesday is where I want to be.
"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."
Wednesday did not reveal the duration of Palmer's new contract.