The former Chelsea midfielder took charge of the club in October 2013 and led the Premier League outfit to the League Cup final, where they were beaten by Manchester City.
Poyet also managed to steer the Black Cats away from the Premier League relegation zone in the final weeks of the season with wins over the likes of Manchester United and Chelsea.
"I am delighted to extend my stay with Sunderland AFC, after an unbelievable season and our famous great escape," he told the club's official website. "Stability is absolutely key to long-term and sustained success for any football club, and this new contract gives both the club and me that stability going forward.
"Now it's a different challenge for me and the club and I am relishing the next stage with Sunderland. We achieved so much last season, working together - the club and the fans - and we took many good memories from the season."
"The prospect of creating more of those memories is one which excites me, and now I cannot wait for the next chapter in my career and the history of Sunderland AFC."
Poyet's backroom staff will also remain with the club.