Sources told ESPN the deal is for six years and $90 million. He will make $9.5 million in 2016, up from a previous base contract of $2 million.
Taylor could earn up to $20 million more through difficult-to-reach incentives, sources said, but the Bills can release him by the third day of the 2017 league year and pay him only the $9.5 million he would have made in 2016. They have another out available after the second year of the deal.
"I'm definitely thankful for the Pegulas, for the Bills organization and for Rex Ryan, for giving me an opportunity, first and foremost," Taylor said. "Them offering me a contract for this many years definitely shows that they're all-in, which is what our phrase is for this year. As far as a mindset going into a game, having financial stability or not having it, I'm a competitor from day one."
The team announced the deal Friday, reached a day before the Bills open their preseason by hosting the Indianapolis Colts. Taylor was entering the final year of his contract.
Next year's option is for $15.5 million with a base salary of $12 million, sources said.
Before the team exercises the option for the second year, that year is guaranteed for injury at $27.5 million, sources said. After the option is exercised, the guarantee becomes $50 million for injury and $40.25 million fully guaranteed -- including the money he was paid in 2016 and a portion of his 2018 base salary.
Taylor's base salary of $13 million for the 2018 season will become guaranteed in March of that year. The deal contains no guarantees for after the 2018 season, sources said.
"Every year you have something to prove," Taylor said of the Bills' options in the deal. "This is a competition-driven league. It's not like the NBA where everything is guaranteed. You can cut at any given time. Every time you step on that field, you have something to prove, and that's been my mindset every time I step on the practice field -- there's something for me to prove, and I'm going to continue to keep showing that every time."
Contract talks ramped up over the past month, and the signing comes a week after Taylor's agent, Adisa Bakari, attended training camp outside Rochester, New York.
"We looked at it as we have a quarterback now," general manager Doug Whaley said. "I hate to say it, but lack of a better term, we didn't want to be greedy. We like working with Tyrod. We have faith in Tyrod. The coaching staff has faith in Tyrod. But most importantly, the team has faith in Tyrod and Tyrod has faith in himself. So, we said let's go with what we have on hand and we're excited about the future."
The 27-year-old is being rewarded for displaying his dynamic dual-threat potential with a strong arm and scrambling ability in going 8-6 as a first-time starter last season and being named to the Pro Bowl. He completed 242 of 380 attempts for 3,035 yards and threw 20 touchdown passes. He set the franchise record for quarterbacks with 586 yards rushing and scored four times, trailing only Cam Newton in rushing yards (636) and rushing touchdowns (10) by a quarterback.
Taylor did miss two games with a knee injury.
"We went back and looked at everything he did last year and then we took into consideration how he came into the offseason, how he's got a greater command of the offense, and a greater command of the team," Whaley said. "And then when you take into account what he has shown on the field in this preseason camp, we just felt, again, that it was the right time and the right deal for both parties involved."
Taylor spent his first four seasons serving as Joe Flacco's backup with the Baltimore Ravens before signing with the Bills in free agency in March 2015. He won the No. 1 job in Buffalo after a three-way offseason competition against former starter EJ Manuel and Matt Cassel.
This year, Taylor has already shown signs of becoming more confident and taking on a larger leadership role. Numerous offensive players have credited him for being more assertive in the huddle.
Coach Rex Ryan and offensive coordinator Greg Roman project that Taylor has great potential to build off last season because he is more familiar with the playbook.
Buffalo's offense made significant jumps under Taylor last year and after the team retooled its roster by adding several established threats, including running back LeSean McCoy and tight end Charles Clay.
The Bills led the NFL with 2,432 yards rushing and finished 13th with 5,775 net yards offense, the most since 1992.
Taylor becomes the latest candidate to fill what has been an unsettled position in Buffalo since Hall of Fame quarterback Jim Kelly retired after the 1996 season. Since then, the Bills have had 12 quarterbacks, including Taylor, start at least eight games. It's a group that included Todd Collins, J.P. Losman, Trent Edwards and Kyle Orton.
Drew Bledsoe, from 2002 to 2004, was the only quarterback to retain the starting job over a three-season stretch.
Taylor becomes Buffalo's third quarterback to earn a contract extension since Kelly retired, joining Ryan Fitzpatrick in 2011 and Doug Flutie in 1999.
Fitzpatrick's extension, a six-year, $59 million deal, was notable because it failed to pan out. He lasted just one more season in Buffalo before being cut after the 2012 campaign, and the Bills started fresh by using a first-round pick to draft Manuel.
Information from ESPN's Adam Schefter and Dan Graziano, ESPN Stats & Information and The Associated Press contributed to this report.