The improved deal will keep him as manager at Boundary Park until the summer of 2010.
Sheridan could hardly have asked for a better start to his managerial career, taking the Latics into the League One play-off places in his first season in charge.
The 42-year-old, a big favourite with the fans in his playing days, stepped up after Ronnie Moore was sacked last summer. He said: "I am delighted with the way things are going.
"If anybody would have said to me at the start of the season that we would be challenging for promotion I would have snatched their hands off."
Latics chief executive Alan Hardy said: "John is doing a terrific job and we are delighted he has agreed to stay for a further three years."
Talks are also ongoing with Sheridan's backroom team of No 2 Tommy Wright and reserve team coach Lee Duxbury.
What do you make of the deal? Have your say.
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Get Ronnie Moore back, he did a great job!