Schumacher, whose Ferrari great father also raced for Mercedes from 2010-12, will attend every grand prix as back up for seven-times world champion Lewis Hamilton and George Russell.
"Mick is a talented young driver and we're delighted to have him join the team. He is a hard worker, has a calm and methodical approach and is still hungry to learn and improve as a driver," said team boss Toto Wolff in a statement.
"We also know that with two years of experience racing in Formula One under his belt, he will be ready to step into the car at short notice to replace either Lewis or George, should that need arise."
Ferrari earlier announced they had mutually decided not to extend their relationship after four years together.
Schumacher won the Formula Two title in 2020 after joining the Ferrari young driver programme in 2019. He debuted with Ferrari-powered Haas in 2021 and was also a Ferrari reserve last season.
He left Formula One with 12 points and a highest finish of sixth after 43 starts.
"I take this as a new start, and I am just excited and grateful to Toto and everybody involved for putting their trust in me," said Schumacher.
"F1 is such a fascinating world, and you never stop learning, so I look forward to absorbing more knowledge and putting in all my efforts for the benefit of the Mercedes team."
