Wallace made 49 appearances for the Owls last season, having joined the club on a one-year deal in July 2015 following his release by Burnley.
The 31-year-old old, who also had spells with Preston, Sunderland and Celtic, scored six goals last term.
Dundee-born Wallace won his only senior Scotland cap in a 2-0 defeat by Japan in October 2009.
Sheffield Wednesday winger Ross Wallace has signed a new contract to stay with the Championship club until 2018.