The club parted ways with ex-Arsenal academy director Andries Jonker, as well as his assistant Freddie Ljungberg, on Monday after Wolves picked up just four points from the opening four games of the campaign.
Jonker had only been with the side for seven months, taking over in February with the club deep in relegation trouble but eventually managing to save them from the drop.
Schmidt, meanwhile, has been out of work since May after being let go by Mainz following a two-year spell in charge.
"We are delighted to have won over Martin Schmidt for VfL Wolfsburg in such a short space of time," said the club's general manager Tim Schumacher. "He's the right man for the task that lies ahead of us."
Schmidt added: "It didn't take me too long to accept the head coach job at Wolfsburg. Only a few hours passed between our initial contact and me signing the contract.
"It's no great secret that Wolfsburg approached me a few months ago, but I turned down the offer then out of respect and loyalty to Mainz 05. I am really looking forward to this challenge, although we don't have much time as we have two important games on the schedule."
Schmidt's first game in charge of his new team will come tonight when they welcome fellow strugglers Werder Bremen to the Volkswagen Arena.