Wagner's hugely successful tenure at Huddersfield - which saw him gain promotion to the Premier League in 2017 and secure survival the following year - came to an end in January, the 47-year-old departing by mutual consent with the Terriers bottom of the table and doomed to relegation.
He will now return to management with Schalke, who sacked Domenico Tedesco as their head coach in March and are currently under the interim management of Huub Stevens.
The Gelsenkirchen club secured their Bundesliga status for another campaign last weekend, having endured a miserable season on the back of a second-place finish in 2017-2018.
They will hope for an improvement in fortunes under Wagner, a former Schalke player who won the UEFA Cup with the club in 1997.
"I know from my own best experience as a player the strength that Schalke 04 can develop when the team, club and fans pull together," said Wagner.
"To dive into this world again and help to change the current situation for the better - that is the biggest motivation for me to return to the Bundesliga."
Prior to his stint at Huddersfield, Wagner worked with Jurgen Klopp at Borussia Dortmund, where he coached the club's second team.