Hepatocytes differentiated from human embryonic stem cells (hESCs) have the potential to overcome the shortage of primary hepatocytes for clinical use and drug development. Many strategies for this process have been reported, but the functionality of the resulting cells is incomplete. We hypothesize that the functionality of hPSC-derived hepatocytes might be improved by making the differentiation method more similar to normal in vivo hepatic development. We tested combinations of growth factors and small molecules targeting candidate signaling pathways culled from the literature to identify optimal conditions for differentiation of hESCs to hepatocytes, using qRT-PCR for stage-specific markers to identify the best conditions. Immunocytochemistry was then used to validate the selected conditions. Finally, induction of expression of metabolic enzymes in terminally differentiated cells was used to assess the functionality of the hESC-derived hepatocytes. Optimal differentiation of hESCs was attained using a 5-stage protocol. After initial induction of definitive endoderm (stage 1), we showed that inhibition of the WNT/β-catenin pathway during the 2nd and 3rd stages of differentiation was required to specify first posterior foregut, and then hepatic gut cells. In contrast, during the 4th stage of differentiation, we found that activation of the WNT/β-catenin pathway allowed generation of proliferative bipotent hepatoblasts, which then were efficiently differentiated into hepatocytes in the 5th stage by dual inhibition of TGF-β and NOTCH signaling. Here, we show that stage-specific regulation of the WNT/β-catenin pathway results in improved differentiation of hESCs to functional hepatocytes.