The 26-year-old previously played for the Latics from 2012 to 2013, scoring 17 goals in 50 appearances, before leaving at the start of the 2013-14 season to join Sheffield United.
Baxter was handed a five-month suspension by the FA in July 2015 after failing a drugs test and was released by the Blades a year later, going on to rejoin boyhood club Everton in July 2017.
"He's obviously a player that the fans know well," Oldham boss Richie Wellens told the Manchester Evening News.
"He's talented but has had a couple of indecisive moments in his career. He's made mistakes, but he's been at Everton and trained there every day for the last 15 months, and now it's time for him to step back into first team football and prove how good he is.
"I'm looking forward to working with him and giving him an opportunity to get his career back on track and show everyone what he's got."
Oldham will play in League Two next season after being relegated from League One at the end of the 2017-18 campaign.