Chairman Adam Pearson revealed on BBC Radio Humberside: "Peter's definitely happy with the terms we've offered. But it won't be tied up until mid-January to allow the Football Association to sort out some things at their end."
Taylor, who took over from Jan Molby as City manager in October 2002, comes to the end of his current contract in 2005, but the new deal will keep him at the club until the summer of 2007.
Should he fulfill the five years, it will make him City's longest serving manager since Terry Dolan who was in charge between 1991-97. Four managers came and went in the five years between Dolan's and Taylor's reigns.
He will continue to combine the role with the England Under-21 job, providing the FA are happy with the situation.
Meanwhile, goalkeeper Boaz Myhill has signed a contract extenstion that will keep him in Hull until 2007 as well.