The 28-year-old returns to the club after two seasons with Bristol City in the Women’s Super League.
Matthews, who spent the 2018-19 campaign with the Reds, is a versatile player who can operate both as a defender or in midfield.
She will reunite with LFC Women boss Matt Beard, who managed her at Bristol City last season.
She told Liverpoolfc.com: “I’m delighted to be back. When I knew Matt was coming to Liverpool it was always on the radar to come back.
“I loved playing in front of the fans here, they build up a great atmosphere and I had a great relationship with the girls.