Preston was born on September 2, 1946 in Houston. When he was three, the family moved to Los Angeles, where Preston began playing piano while sitting on his mother Robbie's lap. Noted as a child Prodigy, Preston was entirely self-taught and never had a music lesson. By the age of ten, he was playing organ onstage backing several gospel Singers such as Mahalia Jackson, James Cleveland and Andraé Crouch. At the age of 11, Preston appeared on an episode of Nat King Cole's NBC network TV show singing the Fats Domino hit "Blueberry Hill" with Cole. Also at 11, he appeared in St. Louis Blues, the 1958 W. C. Handy biopic starring Nat King Cole; Preston played Handy at a younger age.

Preston first met the Beatles as a 16-year-old in 1962, while part of Little Richard's touring band, when their manager Brian Epstein organized a Liverpool show, at which the Beatles opened. The Washington Post explained their subsequent meeting:

Preston lived in London for a time, possibly around 1969–1971, but he moved back to the USA in the early 1970s.

Another traumatic incident, which reportedly affected Preston deeply, occurred in the early 1970s, while he was engaged to actress/model Kathy Silva. At this time Preston had become close friends with musician Sly Stone, and made many contributions to Stone's recordings of the period (including the landmark album There's a Riot Goin' On). According to Moore, Preston was devastated when he came home one day to find Stone in bed with Silva (who later famously married Stone on stage at Madison Square Garden). According to Moore, Silva's affair with Stone was the trigger that led Preston to stop having relationships with women. It was after this incident that he began abusing cocaine and having sex with men, and Moore has stated that she saw his drug abuse as his way of coping with the internal conflicts he felt about his sexual urges.

In 1971, Preston left Apple and signed with Herb Alpert's A&M Records. The previous year, he contributed to another hit single when Stephen Stills asked to use Preston's phrase "if you can't be with the one you love, love the one you're with", a song on Stills' self-titled debut solo album.

Following the release of I Wrote a Simple Song on A&M, Preston's solo career peaked at this time, beginning with 1972's "Outa-Space", an instrumental track that further popularized the sound of the clavinet in funk music. The song reached number 2 on the US Billboard Hot 100 and topped Billboard's R&B chart, before going on to win the Grammy Award for Best Pop Instrumental Performance. "Outa-Space" sold over 1 million copies in America, and was awarded a gold disc by the RIAA in June 1972.

Over the next two years, Preston followed up with the US chart-topping singles "Will It Go Round in Circles" (which displaced Harrison's "Give Me Love (Give Me Peace on Earth)" at the top on 7 July 1973) and "Nothing From Nothing", and the number 4 hit "Space Race". Each of the three singles sold in excess of 1 million copies. American Bandstand host and executive Producer Dick Clark enjoyed "Space Race" so much that he used the instrumental for the mid-show break for virtually the remainder of its run.

Miles Davis's album Get Up with It (1974) features a track called "Billy Preston" in his honor.

From 1970, Preston played keyboards (including piano, organ, clavinet and various synthesizers) for the Rolling Stones, sometimes alongside Pianists Nicky Hopkins and Ian Stewart, on their albums Sticky Fingers, Exile on Main St., Goats Head Soup, It's Only Rock 'n Roll and Black and Blue. As the band's primary touring keyboardist from 1973 to 1977, he also performed as a support act with his own band (including Mick Taylor on guitar) on their 1973 European Tour. A Munich performance was documented in the live album Live European Tour 1973. In 1974, along with Beach Boy Dennis Wilson, he composed one of Joe Cocker's biggest hits, "You Are So Beautiful". On October 11, 1975, he was the first musical guest on Saturday Night Live's series premiere episode (along with Janis Ian). Preston's 1973 song "Do You Love Me" was the basis for the Rolling Stones' track "Melody", released on Black and Blue in 1976. Although two of his songs ("Nothing from Nothing" and "Outa-Space") were included in the band's 1975 and 1976 live sets, the Stones and Preston parted company in 1977, mainly due to a disagreement over money. He continued to play on solo records by Stones members like Mick Jagger's Wandering Spirit album, and made appearances on the band's 1981 Tattoo You and 1997 Bridges to Babylon albums.

Preston's solo career began to decline after 1976. After five years with A&M, he signed with Motown. In 1979, he duetted with Syreeta Wright on the ballad "With You I'm Born Again", which reached number 4 on the charts in the US. Failing thereafter to match its success, Preston left Motown in 1984 and focused on session work, contributing to works by various artists such as Luther Vandross (his organ solos were included on Vandross' 1985 hit "Til My Baby Comes Home"), Whitney Houston and Patti LaBelle, among others. He served as musical Director for Nightlife, a late-night talk show hosted by David Brenner that lasted one season from 1986 to 1987.

In 1978, he appeared as Sgt. Pepper in Robert Stigwood's film Sgt. Pepper's Lonely Hearts Club Band, which was based on the Beatles' album of the same name, and sang "Get Back" as the penultimate song.

Preston overcame his problems in the early 1990s, toured with Eric Clapton, recorded with Gary Walker, one of the vocalists in his Los Angeles-based band, and worked with a wide range of other artists. He also toured with Ringo Starr, appearing on his 1990 live album. He was invited to become a member of the Band in 1991, after the death of piano player Stan Szelest. He performed on tour with the group, but the sentencing from his cocaine and sexual assault charges ended the collaboration.

In 1991, Preston was arrested and convicted for insurance fraud after setting fire to his own house in Los Angeles, and he was treated for alcohol and cocaine addictions. In the same year, he was also arrested for sexually assaulting a 16-year-old Mexican boy, after picking him up at a gathering point for day laborers. After submitting to a drug test, he tested positive for cocaine. That year, he entered no-contest pleas to the cocaine and sexual assault charges. He was sentenced to nine months at a drug rehabilitation center and three months of house arrest.

In 1997, Billy Preston recorded the album You and I, in Italy, with Italian band Novecento. The album was produced by Vaughn De Spenza and Novecento members Lino and Pino Nicolosi.

In 1998, Preston played organ during the choir numbers on the UPN comedy show Good News. The same year he sang and played synthesizer in the film Blues Brothers 2000, as part of the Louisiana Gator Boys supergroup.

While touring and fighting his own health problems, Preston received the news that on November 29, 2001, George Harrison had died (having long suffered from throat cancer). Preston, among many of Harrison's longtime friends, performed in the 2002 Concert for George at the Royal Albert Hall in London. Preston's performance of "My Sweet Lord" received critical acclaim. Additionally, he sang "Isn't It a Pity", provided backing vocals on most of the other songs, and played the Hammond organ for the show. Ringo Starr called him one of the greatest Hammond players of all time (in the theatrical version of the concert).

In 2002, Preston appeared on the Johnny Cash album American IV: The Man Comes Around, playing piano on "Personal Jesus" and "Tear-Stained Letter".

In 2004, Preston performed as a jazz organist on Ray Charles' Genius Loves Company, an album of duets, on the song "Here We Go Again" with Charles and Norah Jones.

Preston had suffered kidney disease in his later years, brought on by his hypertension. He received a kidney transplant in 2002, but his health continued to deteriorate. He had voluntarily entered a drug rehabilitation clinic in Malibu, California, at the suggestion of Guitarist Is'real Benton, and suffered pericarditis there, leading to respiratory failure that left him in a coma from November 21, 2005. Preston died on June 6, 2006, in Scottsdale, Arizona.

Preston played clavinet on the song "Warlocks" for the Red Hot Chili Peppers album Stadium Arcadium (2006). Although very ill by this point, he jumped out of his bed after hearing a tape of the song given to him by the band, recorded his part, and went back to bed.

In an interview for a 2010 BBC Radio 4 documentary on his life and career, Preston's manager Joyce Moore revealed that after she began handling his affairs, Preston opened up to her about the lifelong trauma he had suffered as the result of being sexually abused as a boy. Preston told Moore that at about the age of nine, after he and his mother moved to Los Angeles from Houston to perform in a touring production of Amos 'n' Andy, he was repeatedly abused by the touring company's Pianist. When Preston told his mother about the abuse, she did not believe him, and failed to protect him. The abuse subsequently went on for the entire summer, and Preston stated that he was also later abused by a local pastor.