Dayton was born in Elizabethtown (now Elizabeth), New Jersey. He was the son of Elias Dayton, a merchant who was prominent in local politics. He graduated in 1776 from the College of New Jersey (now Princeton University). He served in the 3rd New Jersey Regiment in the American Revolution and attained the rank of captain by the age of 19.

After the war, Dayton studied law and established a practice, dividing his time between land speculation, law, and politics. After serving as a delegate to the Continental Congress and Constitutional Convention, he became a prominent Federalist legislator. Elected to the U.S. House of Representatives in 1789, he did not take his seat, but was elected and took his seat in 1791. He served as speaker for the Fourth and Fifth Congress. Like most Federalists, he supported the fiscal policies of Alexander Hamilton, and suppression of the Whiskey Rebellion. He supported the Louisiana Purchase and opposed the repeal of the Judiciary Act of 1801.

Dayton married Susan Williamson and they had two daughters, but the date of their marriage is unknown.

Dayton met Aaron Burr in Philadelphia, Pennsylvania and became involved in an infamous conspiracy in which Burr apparently intended to conquer parts of what is now the western United States and create an empire. An illness prevented Dayton from accompanying Burr's aborted 1806 expedition, but in 1807 Dayton was arrested for treason. He was released and never brought to trial but his national political career never recovered.

After resuming his political career in New Jersey, he died in 1824 in his hometown and was interred in a vault in St. John's Episcopal churchyard in Elizabeth, New Jersey.

The city of Dayton, Ohio was named after him because he owned 250,000 acres (1,000 km²) of land in Ohio and because he supported the building of the Miami Canal without hesitation.