Macy was born in Miami, Florida, and grew up in Georgia and Maryland. His father, William Hall Macy, Sr., was awarded the Distinguished Flying Cross and an Air Medal for flying a B-17 Flying Fortress bomber in World War II; he later ran a construction company in Atlanta and worked for Dun & Bradstreet, before taking over a Cumberland, Maryland-based insurance agency when Macy was nine years old. His mother, Lois (née Overstreet), was a war widow who met Macy's father after her first husband died in 1943; Macy has described her as a "Southern belle". Macy has a half-brother, Fred Merrill, from his mother's first marriage.

Macy describes himself as a "joker", though he was relatively shy until high school. After his brother taught him to play guitar, he sang a song in a talent show, much to the crowd's approval. He later ran for class president, though he had a poor academic record. After graduating in 1968 from Allegany High School in Cumberland, Maryland, he participated in the anti-war hippie movement.[citation needed] Macy studied veterinary medicine at Bethany College of West Virginia. By his own admission a "wretched student," he transferred to Goddard College and became involved in theatre where he performed in ensemble productions of The Three Penny Opera, A Midsummer Night's Dream and a wide variety of contemporary and improvisational pieces. That is where he first met David Mamet. After graduating in 1971, he moved to Chicago, Illinois, and got a job as a bartender to pay the rent. Within a year he and David Mamet, among others, founded the successful St. Nicholas Theater Company, where Macy originated roles in a number of Mamet's plays, such as American Buffalo and The Water Engine.

After spending some time in Los Angeles, California, Macy moved to New York City in 1980. While living there he had roles in over fifty off-Broadway and Broadway plays. One of his on-screen roles was as a turtle named Socrates in the direct-to-video film, The Boy Who Loved Trolls (1984), under the name W. H. Macy. He has appeared in films that Mamet wrote and/or directed, such as House of Games, Things Change, Homicide, Oleanna (playing a role he reprised after originating the role in the play of the same name), and more recently, Wag the Dog, State and Main, and Spartan.

Macy may be best known for his lead role in Fargo, for which he was nominated for an Academy Award and helped boost his career and recognizability, though at the expense of nearly confining him to a narrow typecast of a worried man, down on his luck. Subsequent roles gave Macy a break with Benny & Joon, Above Suspicion, Mr. Holland's Opus, Ghosts of Mississippi, Air Force One, Boogie Nights, Pleasantville, Gus Van Sant's remake of Psycho, Happy, Texas, Mystery Men, Magnolia, Jurassic Park III, Focus, Panic, Welcome to Collinwood, Seabiscuit, The Cooler, and Sahara.

Macy has also had a number of roles on television, the most recent being a guest appearance on The Unit as the President of the United States. In 2003, he won two Emmy Awards, one for starring in the lead role and one as co-writer of the made-for-TNT film Door to Door. Door to Door is a drama based on the true story of Bill Porter, a door-to-door salesman in Portland, Oregon, born with cerebral palsy. The film is composed of several stories, each taking up a whole period between commercials.

His work on ER and Sports Night has also been recognized with Emmy nominations. His character in ER, David Morgenstern, is responsible for a sage piece of advice that has been handed down throughout the series. In the pilot episode, when Juliana Margulies' character, nurse Carol Hathaway, is brought to the hospital with a drug overdose, Morgenstern tells Dr. Greene (Anthony Edwards) that he needs to "set the tone" to get the unit through the difficulty of treating one of its own. "You set the tone" is repeated several times in the series.

In a November 2003 interview with USA Today, Macy stated that he wants to star in a big-budget action movie "for the money, for the security of a franchise like that". He serves as director-in-residence at the Atlantic Theater Company in New York, where he teaches a technique called Practical Aesthetics. A book describing the technique, A Practical Handbook for the Actor (ISBN 0-394-74412-8), is dedicated to Macy and Mamet.

In 2007 Macy starred in Wild Hogs, a film about middle-aged men reliving their youthful days by taking to the open road on their Harley-Davidson motorcycles from Cincinnati to the Pacific Coast. He recently completed filming on The Maiden Heist, a comedy that co-stars Morgan Freeman and Christopher Walken.

On June 23, 2008, the Hollywood Chamber of Commerce announced Macy and his wife, Felicity Huffman, will each receive a star on the Hollywood Walk of Fame in the upcoming year.

On January 13, 2009, Macy replaced Jeremy Piven in David Mamet's Speed-the-Plow on Broadway. Piven suddenly and unexpectedly dropped out of the play in December 2008 after he experienced health problems related to high mercury levels in his blood; Norbert Leo Butz covered the role from December 23, 2008, until Macy took over the part.