Grammer was born February 21, 1955, in Charlotte Amalie, Saint Thomas, U.S. Virgin Islands, the son of Sally (née Cranmer; 1928–2008), a singer and Actress, and Frank Allen Grammer, Jr. (d, 1968), a musician and owner of a coffee shop and a bar and grill called Greer's Place. He had one younger sister. Grammer was two years old when his parents divorced.

Grammer and his sister Karen were subsequently raised by their mother and grandparents in New Jersey. The family relocated to Florida, and shortly afterwards his grandfather died when Kelsey was twelve. Two years later, in 1968, Frank Allen Grammer, his father, was murdered.

After leaving Juilliard, Grammer had a three-year internship with the Old Globe Theatre in San Diego in the late 1970s before a stint in 1980 at the Guthrie Theater in Minneapolis, Minnesota. He made his Broadway debut in 1981 as "Lennox" in Macbeth, taking the lead role when Philip Anglim withdrew after receiving negative reviews. Grammer then played Michael Cassio in a Broadway revival of Othello, with James Earl Jones and Christopher Plummer. In 1983 he performed on the demo of the Stephen Sondheim–James Lapine production Sunday in the Park with George, starring Mandy Patinkin. In 2000, Grammer again played Macbeth on Broadway, in a production that closed after only 10 days.

Grammer won a scholarship to the prestigious Juilliard School. He was a member of Group 6, 1973–1975. He failed to attend classes and was eventually expelled.

On July 1, 1975, Grammer's younger sister, 18-year-old Karen Grammer, was abducted, raped, and murdered by Freddie Glenn, Michael Corbett and one other man. Grammer, then 20, identified her body. He and his sister had been close, and he was devastated by her death; his later bouts of alcoholism and drug addiction were fueled in part by guilt and depression.

Grammer's television career began in the early 1980s when he portrayed Stephen Smith in the NBC miniseries Kennedy.

Grammer has been married four times and has seven children and one grandchild as of 2016. His first marriage, to dance instructor Doreen Alderman, lasted from 1982 to 1990, although they were separated for the last six years of that period. They have one daughter, Actress Spencer Grammer (born October 9, 1983). Through Spencer, Grammer has one grandson, Spencer's son Emmett Emmanual Hesketh (born October 10, 2011).

Grammer has a history as a frequent abuser of alcohol. In 1988, Grammer was arrested for drunk driving and cocaine possession and sentenced to 30 days in jail. In August 1990, Grammer was arrested again for cocaine possession and was sentenced to three years' probation, fined $500, and required to perform 300 hours of community Service. In January 1991, Grammer was given an additional two years' probation for violating his original probation through additional cocaine use. The cast and producers of both Frasier and Cheers held interventions to attempt to help him. Grammer's personal problems affected his work; co-star Bebe Neuwirth and Writer Ken Levine cited delays with rehearsals and filming due to his erratic behavior. Writer Dan O'Shannon recalled, however, that

Grammer's well-known voice and mid-Atlantic accent make him popular for voiceover work. He has provided the voice of Sideshow Bob on The Simpsons, winning an Emmy Award for his work in the episode "The Italian Bob", his fifth Emmy win. He has appeared in eighteen episodes from the show's inception in 1989 through 2015's "Treehouse of Horror XXVI", in which his character finally succeeded in killing Bart Simpson in one segment ("Wanted: Dead, then Alive"). Grammer supplied the voices for "Stinky Pete the Prospector" in 1999 Disney/Pixar film Toy Story 2, Vladimir in the Fox animated movie Anastasia, Rothbart in Barbie of Swan Lake, Zozi the Bear in the subsequently produced sequel Bartok the Magnificent, the title character in the short-lived animated series Gary the Rat, and the villain, Dr. Ivan Krank, on Disney's Teacher's Pet. He provided the opening speech and piano in The Vandals' song "Phone Machine" from the album Fear of a Punk Planet, and sang a rewritten version of the "grinch" on an episode of Just Shoot Me!. He was the voice of the mad scientist monkey, Dr. Frankenollie, in the Mickey Mouse short Runaway Brain. He was also the narrator of Mickey Mouse – Once Upon a Christmas.

His second marriage, to former exotic Dancer Leigh-Anne Csuhany in September 1992, lasted one year. Grammer filed for an annulment when Csuhany was three months pregnant and evicted her from their home. The pregnancy ended in a miscarriage. Grammer claimed she was abusive and fired a gun at him.

Frasier Crane also had a crossover appearance in 1993 Wings episode "Planes, Trains, & Visiting Cranes".

In 1994, he met 28-year-old Tammi Baliszewski, also known as Tammi Alexander, at a bar in Manhattan Beach, California. In December 1994, they appeared together on the cover of People magazine, announcing their engagement and Grammer's substance abuse problems.

In 1995, Grammer was sued by ex-girlfriend Cerlette Lamme for defamation of character and invasion of privacy over content he included in his autobiography So Far. The same year, he was accused of statutory rape by the parents of his child's 17-year-old babysitter, but authorities cleared him when no evidence was found. In September 1996, he crashed his Dodge Viper while intoxicated, and subsequently checked into the Betty Ford Center (an alcohol rehabilitation clinic) for 30 days. In 1998, Grammer filed a lawsuit against Internet Entertainment Group (IEG), which Grammer claimed had stolen from his home a videotape of him having sex with a woman. IEG countersued Grammer, denying it was in possession of such a tape, and Grammer's suit was eventually dropped. IEG President Seth Warshavsky later said, "We have been presented with another Kelsey Grammer tape. But we have no plans to air it. We are still evaluating it at this time." Grammer later reflected,

In 1996, he starred in the feature comedy Down Periscope. Also, in the 1990s, he did several commercials for Snapper Mowers. Additionally, his film work includes the role of Dr. Hank McCoy (also known as the Beast) in X-Men: The Last Stand and he was the voice of Snowball in the live-action film adaptation of the George Orwell book Animal Farm. Grammer co-starred in the movie Swing Vote, playing the Republican incumbent. He played General George S. Patton in An American Carol. In 2010, he starred in The Kelsey Grammer Bill Zucker Comedy Hour.

Grammer's voice has been featured in many commercials. One of the earliest was a 1998 commercial for Honey Nut Cheerios, where he played the voice of the wolf in Little Red Riding Hood. Since 2006, Grammer has provided the voice for television commercials advertising Hyundai. In 2008, Grammer reprised his role of Dr. Frasier Crane in a commercial for Dr Pepper (Frasier and Cheers co-star Bebe Neuwirth also reprised her role as Lilith Sternin in the same commercial, albeit in voice only). In 2013, Grammer voiced the Tin Woodman in Legends of Oz: Dorothy's Return. In 2016, Grammer narrated the opening video package for WrestleMania 32 and he voiced the role of Hunter in Storks.

Grammer has received at least 45 nominations for major awards and has won on 18 occasions. He has received 14 individual Emmy Award nominations for four different television shows (plus an additional two as part of the Frasier ensemble) and has won five times. At the Golden Globes, he has received nine nominations and three times been victorious. He has received two People's Choice Awards, and in 1999 his directorial skills were recognized with a nomination for a Directors Guild of America award for directing an episode of Frasier. He received a Saturn Award nomination for Best Supporting Actor for his role in X-Men: The Last Stand. On May 22, 2001, he was presented with a star on the Hollywood Walk of Fame for television. On April 20, 2009, Grammer was presented the inaugural Television chairman's Award at the annual NAB Show in Las Vegas. In 2010, Grammer enjoyed his first Tony Award nomination for La Cage Aux Folles as Best Leading Actor in a Musical. In 2016, he received his second Tony Award nomination for The Color Purple as Best Revival of a Musical and won the award.

In 2005, Grammer returned to television. He produced and appeared in an American adaptation of the British show The Sketch Show, which aired on Fox. The main cast consisted of Malcolm Barrett, Kaitlin Olson, Mary Lynn Rajskub and Paul F. Tompkins, as well as Lee Mack from the British version of the show. Grammer appeared in only short opening and closing segments in each episode. Many of the sketches from the British version were re-created, such as the "California Dreamin'", "English Course", and "Sign Language" sketches. Only six episodes of the show were made, and it was canceled after only four of them had aired.

In 2007, Grammer starred with Patricia Heaton in the American sitcom Back to You. It was canceled by Fox after its first season.

Grammer is a member of the Republican Party and has expressed an interest in someday running for United States Congress. He has also expressed an interest in running for Mayor of New York, and for the U.S. Presidency. Grammer was a guest at President George W. Bush's first inauguration. Grammer endorsed Rudy Giuliani in the 2008 presidential primary and later campaigned for John McCain in the general election. Grammer promoted RightNetwork, a conservative start-up American television network. He endorsed Michele Bachmann for the Republican nomination for President in 2012. After Mitt Romney won the nomination, Grammer endorsed him. He supported Ben Carson's candidacy for the Republican Presidential nomination in 2016, although he endorsed Donald Trump when the latter was selected.

While a New York magazine profile published in 2010 described him as pro-choice, Grammer in 2015 posted an Instagram photo of himself with his wife Kayte wearing a T-shirt by the pro-life group Abort73. City A.M. described Grammer as "one of Hollywood's best-known Republicans, a rare spark of red in a blue sea of Democrats".

In 2011 and 2012, Grammer starred in the Starz drama series Boss as a fictional mayor of Chicago in the mold of Richard J. Daley which premiered in October 2011. It was his first dramatic TV series. At the 2012 Golden Globe Awards Kelsey Grammer won the award for Best Actor in a Television Series Drama for his role on Boss. The show ran for 18 episodes over two seasons.

In addition to being Producer, he guest-starred as the Angel of Death on Medium, and Captain Morgan Bateson in the Star Trek: The Next Generation episode "Cause and Effect". Grammer was also the featured guest on long running BBC Radio 4 programme, Desert Island Discs, in December 2017.

In an interview with Oprah Winfrey, Grammer stated he could consider forgiving the men involved if they would at least take responsibility for the crime, but that they all continued to say they were innocent. In the same interview, Grammer expressed his loss of faith for a few years after Karen's death. He subsequently forgave Glenn, but refused to support his release, saying it would "be a betrayal of my sister’s life.”