The 27-year-old, whose current deal was due to expire at the end of the season, has admitted his delight at signing the contact.
"It's what I wanted and didn't take long. I didn't want to move from the start and I am just happy to get a bit of security," he told the club's official website.
"I'm not sure really sure what would have happened with Eddie [Howe] here, because we didn't really discuss anything. But the new manager made it clear that he wanted me to stay.
"I am enjoying my football and as long as I am playing games I am happy. I want to play at the highest level I possibly can. The manager has come in with the same ambition, so it's a good situation."
Wallace joined Burnley from Preston North End in 2010.