The 28-year-old joined the club in the summer from French side Marseille in a deal worth more than £10m.
The France international has excelled this season, scoring six goals in 22 appearances to help the Hammers to sixth in the Premier League.
The new deal - replacing Payet's previous five-year contract - lasts until summer 2021.
Earlier this week, the club denied media reports that Payet had made demands over a new contract.
Speaking after West Ham's 2-1 FA Cup win over Liverpool on Tuesday, manager Slaven Bilic said: "We are a club moving forward and the most important moves are on the pitch.
"We must do everything we can to keep our best players, and he is our best player."
Hammers co-owner David Sullivan recently described Payet as the "signing of the season".
"He's the best player I've signed in 25 years," said the 67-year-old.
"He's a £30m player, now the highest-paid player of all time in West Ham. He's a supreme footballer. He makes every player in our side play better.
"On his day, he's world class, he's unstoppable."
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