Bishop, 26, moved into the Packers' starting lineup in Week 5 after Nick Barnett sustained a season-ending wrist injury. Bishop, a special-teams standout during his first three NFL seasons, finished second on the team in tackles with 103. He also had three sacks and returned an interception for a touchdown.
The deal, reportedly worth $19 million, was agreed upon during the past week, according to the Milwaukee Journal Sentinel.
Bishop confirmed the new deal through his Twitter account and thanked friends for their congratulations, saying, "I'm EXCITED! BLESSED!; glad to be staying w/ the #PACKNATION. Means more than $."
McCarthy said Bishop has "earned this" and the coach is proud of the way the linebacker has played.
Under current NFL labor rules, the fourth-year pro could have become a free agent after this season.
The Packers received more good news Wednesday when defensive lineman Cullen Jenkins returned to practice. Jenkins missed four games because of a calf injury.
The Associated Press contributed to this report.