diff --git a/packages/compiler/src/init/scaffold.ts b/packages/compiler/src/init/scaffold.ts
index e2aba213e6..55944c3450 100644
--- a/packages/compiler/src/init/scaffold.ts
+++ b/packages/compiler/src/init/scaffold.ts
@@ -98,9 +98,10 @@ async function writePackageJson(host: CompilerHost, config: ScaffoldingConfig) {
     return;
   }
   const dependencies: Record<string, string> = {};
+  const peerDependencies: Record<string, string> = {};
 
   if (!config.template.skipCompilerPackage) {
-    dependencies["@typespec/compiler"] = "latest";
+    peerDependencies["@typespec/compiler"] = "latest";
   }
 
   for (const library of config.libraries) {
@@ -112,6 +113,7 @@ async function writePackageJson(host: CompilerHost, config: ScaffoldingConfig) {
     version: "0.1.0",
     type: "module",
     dependencies,
+    peerDependencies,
     private: true,
   };
 
diff --git a/packages/compiler/test/init/init-template.test.ts b/packages/compiler/test/init/init-template.test.ts
index 02c4a14d18..41a1100164 100644
--- a/packages/compiler/test/init/init-template.test.ts
+++ b/packages/compiler/test/init/init-template.test.ts
@@ -37,11 +37,14 @@ describe("compiler: init: templates", () => {
       });
 
       deepStrictEqual(JSON.parse(getOutputFile("package.json")!).dependencies, {
-        "@typespec/compiler": "latest",
         foo: "~1.2.3",
         bar: "latest",
       });
 
+      deepStrictEqual(JSON.parse(getOutputFile("package.json")!).peerDependencies, {
+        "@typespec/compiler": "latest",
+      });
+
       strictEqual(getOutputFile("main.tsp")!, 'import "foo";\nimport "bar";\n');
     });
   });