Reid spent two months on loan at the Midlands club last season, helping them to a second-place finish in the Championship (second division) behind Newcastle United.
"He made a big impact last season - both on and off the field," manager Roberto Di Matteo said on the club website (www.wba.co.uk).
"He was a consistent performer and also great in the dressing room. Reidy's a really positive character -- and you can never have too many of those in your squad."
Reid, 29, will join on a Bosman free transfer on July 1 after completing a medical and signing a two-year contract.
(Reporting by Toby Davis; Editing by Justin Palmer