The 26 year old was an engine in the Owls midfield this season, and played a vital role in their 13th place finish. He was the hero in the Yorkshire derby clash with Rotherham, notching a stoppage time winner to secure a 3-2 victory.
Lee has made 89 appearances since his arrival from Oldham in 2012, and signs the contract on the back of his best season so far at Hillsborough. He scored 6 times in 34 appearances.
Owls boss Stuart Gray will be delighted the contract negotiations were completed early, removing any speculation about his future with other Championship clubs showing interest in his services.
Lee was also awarded the player of the month award in April.
His contract was due to expire at the end of this month, but he will now remain a Wednesday player until the summer of 2017.