Taylor, 65, has been in the role on an interim basis since December following the resignation of Jimmy Russo.
The former England coach, who was manager at Vicarage Road for two spells, will work on a non-executive basis so he can have other roles outside the club such as his work as a pundit for the BBC. It is unclear if it will have any effect on his position at the Iron, the club he supports.
"The club has faced and continues to face challenging times. I would like to see if I can play my part in the continuing work to re-establish stability at Watford," he told the club's official website.
"I'm not coming back to run Watford Football Club. I have great confidence in the executive staff and they have my full support."