The club’s website revealed that the 29-year-old, whose contract expires this summer, is set to depart Turf Moor after five years.
The former Celtic and Sunderland wide man leaves along with midfielder Steven Reid, who announced his retirement from football this week.
Scottish international Wallace will leave Turf Moor following the final game at Aston Villa this weekend, having made 165 appearances and scoring 13 goals for the club.
He told the club’s website: “It’s a sad day for me to be leaving Burnley. I have thoroughly enjoyed five terrific years at the club and made many friends.
“I would like thank the manager, his staff, the players and the supporters for all their backing and I wish the club every success in the future.”
However, Burnley are set to open talks with long-serving defender Michael Duff over a new deal.
Duff, who joined the Clarets in 2004, is in his testimonial year at the club, which culminates in a game at Turf Moor on August 1.