Recent studies have shown that Notch signaling plays an important role in epidermal development, but the underlying molecular mechanisms remain unclear. Here, by integrating loss- and gain-of-function studies of Notch receptors and Hes1, we describe molecular information about the role of Notch signaling in epidermal development. We show that Notch signaling determines spinous cell fate and induces terminal differentiation by a mechanism independent of Hes1, but Hes1 is required for maintenance of the immature state of spinous cells. Notch signaling induces Ascl2 expression to promote terminal differentiation, while simultaneously repressing Ascl2 through Hes1 to inhibit premature terminal differentiation. Despite the critical role of Hes1 in epidermal development, Hes1 null epidermis transplanted to adult mice showed no obvious defects, suggesting that this role of Hes1 may be restricted to developmental stages. Overall, we conclude that Notch signaling orchestrates the balance between differentiation and immature programs in suprabasal cells during epidermal development.