The deal is worth $700,000, the source said.
Baxter, 28, was claimed off waivers last month from the New York Mets. In 155 plate appearances this year, he batted .189 with no home runs and four runs batted in.
Baxter will provide the Dodgers with depth in their outfield, which includes Yasiel Puig, Matt Kemp, Andre Ethier and Carl Crawford. Baxter played both corner outfield positions with the Mets this year.
Baxter was eligible for salary arbitration for the first time, but was a candidate to not be tendered a contract. The Dodgers might have parted ways with him had they not been able to agree on a deal with him by Monday, which is the deadline to tender contracts to arbitration-eligible players.
The Dodgers have four players who remain eligible for salary arbitration: Clayton Kershaw, Kenley Jansen, A.J. Ellis, Ronald Belisario.