The derivation of human inner ear tissue from pluripotent stem cells would enable in vitro screening of drug candidates for the treatment of hearing and balance dysfunction and may provide a source of cells for cell-based therapies of the inner ear. Here we report a method for differentiating human pluripotent stem cells to inner ear organoids that harbor functional hair cells. Using a three-dimensional culture system, we modulate TGF, BMP, FGF, and WNT signaling to generate multiple otic-vesicle-like structures from a single stem-cell aggregate. Over 2 months, the vesicles develop into inner ear organoids with sensory epithelia that are innervated by sensory neurons. Additionally, using CRISPR-Cas9, we generate an ATOH1-2A-eGFP cell line to detect hair cell induction and demonstrate that derived hair cells exhibit electrophysiological properties similar to those of native sensory hair cells. Our culture system should facilitate the study of human inner ear development and research on therapies for diseases of the inner ear.