Human embryonic stem cells (hESCs) can differentiate to various somatic lineages, including stratified squamous epithelia, although the molecular mechanisms of epithelial specification from hESCs currently remain undefined. Here, we demonstrate a novel, stage-specific effect of retinoic acid (RA) on epithelial differentiation of hESCs. RA strongly upregulated expression of keratin 18 and the transcription factor p63, which is involved in epidermal morphogenesis and ectodermal specification, while repressing early neural marker transcription. RA-induced hESCs efficiently differentiated to keratin 14-expressing epithelial cells, although this effect was dependent upon on the context of bone morphogenetic protein signaling. Furthermore, these hESC-derived keratinocytes could be subcultured to obtain relatively pure keratinocyte populations that retained the capacity to terminally differentiate. These findings suggest that RA plays an important role in epithelial differentiation of hESCs.