The country singer is said to be working with the British 'A-Team' singer-songwriter at a Los Angeles studio.
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© BBC/Whizz Kid/Adam Lawrence
"Ed and Taylor have been in the studio in LA a lot over the past few weeks working on new material," a source told The Sun.
"She's into her British music and became a massive fan of Ed before asking to work with him recently. There is a mutual affection between the pair."
It is currently unclear if the collaboration will be on one or several tracks, but a co-writing credit is expected for Sheeran on Swift's upcoming fourth studio album.
"It's still to be officially decided how the material will be released but just a single credit on her album will be worth big money.
"Taylor's country sound is massive around the world."
Ed Sheeran has recently completed a US tour, while he also worked with One Direction on their debut album.
Taylor Swift was recently tipped to play Sandy in a remake of Grease by original star Olivia Newton-John.
Watch Ed Sheeran talk to Digital Spy about his US collaborations below:
