The German carmaker did not reveal the exact amount it would pay dealers, but the Reuters news agency reported that it could be close to $1.2bn (Â£911m).
Last year, it was revealed that VW diesel cars were fitted with software that could disguise emissions levels.
The scandal hit sales of VW cars in the US, prompting 650 dealerships to start a class action against the company.
"We believe this agreement in principle with Volkswagen dealers is a very important step in our commitment to making things right for all our stakeholders in the United States," said Hinrich Woebcken, chief executive of VW's North American region.
Last year, US regulators discovered software had been installed in diesel engines to detect when they were being tested, and so improve test results.
Sales of VW cars in the US fell by 14.6% in the first six months of 2016 compared with the same period a year earlier.
Steve Berman, a lawyer representing the dealers, said that VW franchise owners who had invested millions in their businesses had been "financially hurt" by the scandal. He told a court in Seattle that the agreement would have a "therapeutic effect" to help heal VW's relationship with its dealers and its customers.
The deal still needs official court approval, and the settlement does not end VW's legal struggles.
The company still has to decide if it is going to pay to fix or buy-back 3-litre diesel engine cars affected by the scandal.
In June, the company reached a deal with the US government to buy back 500,000 2-litre vehicles at their pre-scandal value.
VW is also facing several civil lawsuits launched by owners of the affected vehicles.
Attorneys General in states including New York and Maryland have launched their own legal action alleging VW executives took steps to hide the use of the software.
Outside the US, VW still faces multiple investigations by regulators.
Volkswagen has told a court that it plans to compensate US car dealers impacted by the emissions scandal.