The 60-year-old will receive a £2.5million bonus for keeping the club in the Premier League this season.
The Toffees are hovering above the relegation zone after winning just five times in 17 attempts.
It is understood that Ancelotti will be officially unveiled on Thursday this week.
Ancelotti reached an agreement with the Toffees on Monday night after the club confirmed they had held meetings with a number of candidates.
He will pocket a basic salary £11.5million-per-year in Merseyside, with a bonus of £2.5m if he keeps the Toffees in the Premier League.