Hoffmann's mother was raised in a devout Catholic family on Long Island, the daughter of an attorney. She was previously married to Director Michel Auder in 1969. Gaby has a half-sister, Alexandra "Alex" Auder, who is 11 years older. Auder teaches yoga in New York City. Hoffmann's father was raised in Wiggins, Mississippi by his maternal grandparents; his own father, Gaby's biological great-grandfather was referenced, viewed, and stated on the PBS series, Finding Your Roots with Henry Louis Gates Jr. Season 4, Episode 8, to be Gaston L Malecot. An instructor at Columbia University and a World War 1 veteran. Herrera died in 2011 from cancer.

Hoffmann has a daughter, Rosemary, born in November 2014, with longtime boyfriend, Cinematographer Chris Dapkins (born on November 19, 1980). She lives in the Fort Greene neighborhood of Brooklyn.

Hoffmann was born in Manhattan, New York City, New York. Her mother, Viva (born Janet Susan Mary Hoffmann), is an Actress, Writer and former Warhol superstar, and her father, Anthony Herrera, was a soap opera actor best known for his role as James Stenbeck from As the World Turns. Viva and Herrera were estranged shortly after Hoffmann's birth; she was raised by her mother at the Chelsea Hotel in New York. Her father did not have a significant presence in her life. Hoffmann's birth is documented in Brigid Berlin's The Andy Warhol Diaries. An entry dated January 10, 1982, two days after Hoffmann was born, says that a friend of Warhol's telephoned Warhol and told him that they were going to the Chelsea Hotel to see Viva and her new baby.

Hoffmann began her acting career at the age of four to help pay the family bills by acting in commercials. In 1989, she starred in her first movie, Field of Dreams, with Kevin Costner. 1989's Uncle Buck followed, working beside John Candy and up-and-coming child star Macaulay Culkin. However, she grew tired of the rigors of screen performance and temporarily retired. Nevertheless, upon hearing that Culkin (whom she disliked when they worked together) was making a lot of money in feature films, her "competitive spirit got the best of her," as she later put it, and she re-entered the profession. She went on to star in This Is My Life (1992), Sleepless in Seattle (1993) with Tom Hanks and The Man Without a Face with Mel Gibson (who also directed the film). According to Hoffmann, it was the praise she received for her performance in This is My Life which encouraged her to pursue a full-time acting career in Hollywood as it gave her the confidence she needed to handle major roles.

Until July 1993, Hoffmann lived in Manhattan's Chelsea Hotel (now a landmark), which Hoffmann later said she enjoyed. According to Hoffmann, she and her best friend Talya Shomron would roller-skate in the hallways, spy on the drug dealer across the hall, and persuade the bellman to go to the neighborhood delicatessen at night to fetch them ice cream.

In 1994, Hoffmann was given the starring role in her own sitcom Someone Like Me (on NBC) about a young girl, Gaby, and her dysfunctional family. Although generally well received, the show only lasted six episodes. Publicity work for the show included personal appearances by Hoffmann on late night talk shows like The Tonight Show with Jay Leno and Late Show with David Letterman.

In 1995, Hoffmann played Andrea Eagerton in the CBS TV film Whose Daughter Is She?.

Between 1996 and 2001, Hoffmann landed roles in several films including Everyone Says I Love You (1996), Volcano (1997), Snapped (1998), The Hairy Bird (1998), 200 Cigarettes (1999), Coming Soon (1999), Black & White (1999), You Can Count on Me (2000), and Perfume (2001).

After she graduated from Calabasas High School in 1999, Hoffmann followed her half-sister Alex's Example and entered New York's Bard College to pursue a degree in literature and writing. Around 2001, she temporarily left her acting career to complete her studies and graduated in 2004; her senior thesis was a documentary film.

Between 2003 and 2007, Hoffmann largely concentrated on a theatre career in New York. Roles included 24 Hour Plays (as Denise at the American Airlines Theatre), The Sugar Syndrome (Williamstown Theatre Festival – July/August 2005), and Third (Mitzi E. Newhouse Theater/Lincoln Center Theater – September – December 2005). In late 2005, she starred in an episode of Law & Order: Criminal Intent. She also appeared in the Broadway play Suburbia, alongside Kieran Culkin and Jessica Capshaw at the Second Stage Theatre on 43rd Street in New York City, which ran from September to October 2006. Hoffmann then returned to the 24 Hours Plays where she acted alongside Jennifer Aniston.

Since 2007, Hoffmann has made a gradual return to film acting. In 2007, she starred in the film Severed Ways: The Norse Discovery of America. In 2008, she appeared in Guest of Cindy Sherman, a documentary on art-scene commentator Paul Hasegawa-Overacker's relationship with enigmatic Photographer Cindy Sherman. Later in 2008, Hoffmann appeared in the documentary Chelsea on the Rocks, which is a tribute to the Chelsea Hotel where she grew up. Directed by Abel Ferrara, the documentary highlights the many personalities and artistic voices that have emerged from the legendary residence.

In 2009, Hoffmann had a supporting role in Todd Solondz's Life During Wartime, and the thriller 13 with Mickey Rourke (released in 2010).

In 2013, she completed work on the lead role of a Web series entitled Lyle, created by Stewart Thorndike and Jill Soloway. It was shot in NYC. She subsequently acquired an apartment in Brooklyn's Fort Greene section. In October 2013, she starred in the 1910s installment of Vanity Fair's The Decades Series, "The First March", directed by Gilly Barnes.

In 2016 she appeared in video as an onstage "stand-in" during the Nostalgic For the Present concert tour of Australian singer Sia Furler for her song, "Unstoppable."

Hoffmann has discussed her full frontal nude scenes in a few of her recent projects including Crystal Fairy, Girls and the Amazon series Transparent. On nudity, Hoffmann said: "People are obsessed with actresses being hairless, fatless Barbie dolls. They can’t imagine that people would want to be anything other than that. When they are, it's looked at as almost a political statement. Look at Lena Dunham. She is a gorgeous woman and people can't stop talking about how brave she is to show herself naked, which I find totally condescending and ridiculous. If Angelina Jolie was naked onscreen no one would say she was brave. The implication is that Lena's brave because she doesn't look the way she's supposed to look. I think that's a shame."