Madsen was born in Chicago, Illinois. His mother, Elaine, was a filmmaker and author. His father, Calvin, was a firefighter. His parents divorced in the 1960s, and his mother left a career in Finance to pursue a career in the arts, encouraged by film critic Roger Ebert. His siblings are Cheryl Madsen, an Entrepreneur, and Future Academy Award nominee Virginia Madsen. Madsen's paternal grandparents were Danish, while his mother is of English, German, Irish, Native American and Scottish ancestry.

Madsen has been writing since the early 1990s. He began writing on match books, napkins and hotel stationery in between his time working on film sets and traveling around the world. In 2005, 13 Hands Publications compiled all of his poetry and released The Complete Poetic Works of Michael Madsen, Vol I: 1995–2005. The original books released were Beer, Blood and Ashes (1995), Eat the Worm (1995), Burning in Paradise (1998), and the now out-of-print A Blessing of the Hounds (2002), 46 Down; A Book of Dreams and Other Ramblings (2004) and When Pets Kill (2005).

Madsen's first wife was Georganne LaPiere. He married Jeannine Bisignano from 1991 to 1995. They have two children, including their son Christian. In 1996, he married DeAnna Madsen. They have three children. He also has one daughter.

In Quentin Tarantino's directorial debut film Reservoir Dogs, Madsen played Mr. Blonde, a villainous mobster. He did not get the role of Mr. Pink (which went to Steve Buscemi), because he had more scenes with Harvey Keitel. For Pulp Fiction, Madsen declined the role of Vincent Vega, which went to John Travolta. Madsen starred in Mike Newell's gangster film Donnie Brasco (1997). He once said of these films: "Some of them I'm only in for 10 minutes, but they bought my name, and they bought my face to put on the DVD box with a gun. What people don't always understand is that I established a certain lifestyle for my family back in the days of Species and Mulholland Falls and The Getaway. I wasn't about to move my six kids into a trailer park. So when people offered me work, it wasn't always the best, but I had to buy groceries and I had to put gas in the car."

Madsen starred in Tarantino's martial arts film Kill Bill. He played Assassin Budd, the brother of Bill (David Carradine) The film was released in two parts, Vol. 1 and Vol.2. In 2004, Tarantino discussed an idea for the film to unite Madsen and Travolta, as The Vega Brothers. In 2007, Tarantino said the film (which he intended to call Double V Vega) was "kind of unlikely now", because of the age of the actors and the onscreen deaths of both characters.

Madsen is also an accomplished Photographer. In 2006, he released his first book of photography entitled Signs of Life, which contained new selections of his poetry and was published by 13 Hands Publications. It was also dedicated to the memory of his friend Chris Penn.

In 2002, Madsen was presented an award for his work with the Shriners Hospital for Children, and he gave a Porsche 928 for his casting Director friend Bruno Rosato. In September 2009, Madsen announced his participation in the Love Ride 26 to help raise money for local charities and those less fortunate. The charity included the celebrities, including Malcolm Forbes, Peter Fonda, Larry Hagman, Billy Idol and Bruce Springsteen among others. The event took place on October 25, 2009, but was canceled in two weeks due to poor ticket sales and a decline in sponsorship and vendor support. Madsen also has a line of hot sauces called American Badass. In 2016, Madsen hosted the event An Intimate Evening with Michael Madsen to benefit Children's Pediatric Cancer.

Madsen played Jim Ricker, the old friend of Jack Bauer (Kiefer Sutherland), in the final season of 24. Madsen starred in the comedy film Let the Game Begin. On January 5, 2012, he entered the Celebrity Big Brother house, where he finished in 4th place in the final. In February 2014, he played Las Vegas casino mogul Ted Binion in Josh Evans' film Death in the Desert. The screenplay was written by John Steppling, based on the book Death in the Desert by crime Writer Cathy Scott. In August 2014, he starred in the Kill Bill-themed music video for the song "Black Widow" by Iggy Azalea featuring Rita Ora.

Madsen starred in the ensemble western film The Hateful Eight (2015). He was among a number of people rumored to have leaked the film's script, before it was released causing Tarantino to almost not make the film and eventually rewrite it. In 2016, he played a dramatized role of former Texas Ranger Phil Ryan in Real Detective on the Investigation Discovery network. In 2017, Madsen signed on as an executive Producer of the under $5K budget feature crime-thriller The Dirty Kind, written and directed by Vilan Trub. After being screened some footage and the trailer for the film by Producer Derek Zuzunaga, Madsen agreed to sign on as EP and make the film citing a need for more quality independent films in the genre.