Coach Sean McDermott made the decision Wednesday, three days after Taylor was replaced by Peterman with 4:53 remaining in the 47-10 loss to the Saints that dropped the Bills to 5-4.
"This is about becoming a better team. Tyrod has made improvements," McDermott told reporters Wednesday. "This is not an indictment on Tyrod. He is an important part of our team and will continue to be an important part of our team.
"I've been impressed with Nate and his maturity at a very early point in his career. He has certainly worked hard. ... The other day, we (saw) some good things, albeit it was a small sample size in a regular season. That said, he has a lot of work to do, just like we all do."
Taylor completed 9 of 18 passes for 56 yards and an interception with a 33.6 passer rating before being benched, which drew cheers from the few remaining home fans.
Peterman, a fifth-round pick, led the Bills on a six-play, 75-yard drive ending in a 7-yard touchdown pass to tight end Nick O'Leary in last Sunday's game. He finished 7 of 10 for 79 yards in his first NFL regular-season action.
Taylor restructured his contract on March 10, and only $1 million of his $10 million base salary for 2018 is fully guaranteed, according to ESPN. He is scheduled to receive a $6 million roster bonus on March 14, 2018.