Tillich was born on August 20, 1886, in the small village of Starzeddel (Starosiedle), Province of Brandenburg, which was then part of Germany. He was the oldest of three children, with two sisters: Johanna (born 1888, died 1920) and Elisabeth (born 1893). Tillich’s Prussian father Johannes Tillich was a conservative Lutheran pastor of the Evangelical State Church of Prussia's older Provinces; his mother Mathilde Dürselen was from the Rhineland and more liberal.

When Tillich was four, his father became superintendent of a diocese in Bad Schönfliess (now Trzcińsko-Zdrój, Poland), a town of three thousand, where Tillich began secondary school (Elementarschule). In 1898, Tillich was sent to Königsberg in der Neumark (now Chojna, Poland) to begin his gymnasium schooling. He was billeted in a boarding house and experienced a loneliness that he sought to overcome by reading the Bible while encountering humanistic ideas at school.

In 1900, Tillich’s father was transferred to Berlin, resulting in Tillich switching in 1901 to a Berlin school, from which he graduated in 1904. Before his graduation, however, his mother died of cancer in September 1903, when Tillich was 17. Tillich attended several universities — the University of Berlin beginning in 1904, the University of Tübingen in 1905, and the University of Halle-Wittenberg from 1905 to 1907. He received his Doctor of Philosophy degree at the University of Breslau in 1911 and his Licentiate of Theology degree at Halle-Wittenberg in 1912. During his time at university, he became a member of the Wingolf in Berlin, Tübingen and Halle.

That same year, 1912, Tillich was ordained as a Lutheran minister in the Province of Brandenburg. On 28 September 1914 he married Margarethe ("Grethi") Wever (1888–1968), and in October he joined the Imperial German Army as a chaplain during World War I. Grethi deserted Tillich in 1919 after an affair that produced a child not fathered by Tillich; the two then divorced. Tillich’s academic career began after the war; he became a Privatdozent of Theology at the University of Berlin, a post he held from 1919 to 1924. On his return from the war he had met Hannah Werner-Gottschow, then married and pregnant. In March 1924 they married; it was the second marriage for both. She later wrote a book entitled From Time to Time about their life together, which included their commitment to open marriage, upsetting to some, but they moved together into old age.

From 1924 to 1925, Tillich served as a Professor of Theology at the University of Marburg, where he began to develop his systematic theology, teaching a course on it during the last of his three terms. From 1925 until 1929, Tillich was a Professor of Theology at the Dresden University of Technology and the University of Leipzig. He held the same post at the University of Frankfurt from 1929 to 1933. Paul Tillich was in conversation with Erich Przywara.

The Fellowship of Socialist Christians was organized in the early 1930s by Reinhold Niebuhr and others with similar views. Later it changed its name to Frontier Fellowship and then to Christian Action. The main supporters of the Fellowship in the early days included Tillich, Eduard Heimann, Sherwood Eddy and Rose Terlin. In its early days the group thought capitalist individualism was incompatible with Christian ethics. Although not Communist, the group acknowledged Karl Marx's social philosophy.

At the age of 47, Tillich moved with his family to America. This meant learning English, the language in which Tillich would eventually publish works such as the Systematic Theology. From 1933 until 1955 he taught at Union Theological Seminary, where he began as a Visiting Professor of Philosophy of Religion. During 1933–34 he was also a Visiting Lecturer in Philosophy at Columbia University.

Tillich acquired tenure at the Union Theological Seminary in 1937, and in 1940 he was promoted to Professor of Philosophical Theology and became an American citizen. At Union, Tillich earned his reputation, publishing a series of books that outlined his particular synthesis of Protestant Christian theology and existential philosophy. He published On the Boundary in 1936; The Protestant Era, a collection of his essays, in 1948; and The Shaking of the Foundations, the first of three volumes of his sermons, also in 1948. His collections of sermons would give Tillich a broader audience than he had yet experienced.

His most heralded achievements though, were the 1951 publication of volume one of Systematic Theology which brought Tillich academic acclaim, and the 1952 publication of The Courage to Be. The first volume of the systematic theology series prompted an invitation to give the prestigious Gifford lectures during 1953–54 at the University of Aberdeen. The latter book, called "his masterpiece", was based on his 1950 Dwight H. Terry Lectureship and reached a wide general readership.

Two of Tillich's works, The Courage to Be (1952) and Dynamics of Faith (1957), were read widely, including by people who would not normally read religious books. In The Courage to Be, he lists three basic anxieties: anxiety about our biological finitude, i.e. that arising from the knowledge that we will eventually die; anxiety about our moral finitude, linked to guilt; and anxiety about our existential finitude, a sense of aimlessness in life. Tillich related these to three different historical eras: the early centuries of the Christian era; the Reformation; and the 20th century. Tillich's popular works have influenced psychology as well as theology, having had an influence on Rollo May, whose "The Courage to Create" was inspired by "The Courage to Be".

These works led to an appointment at the Harvard Divinity School in 1955, where he became one of the University’s five University Professors – the five highest ranking professors at Harvard. He was primarily a professor of undergraduates because Harvard did not have a department of religion for them, but thereby he was more exposed to the wider University and "most fully embodied the ideal of a University Professor."

According to the Stanford Encyclopedia of Philosophy, Tillich believes the essence of religious attitudes is what he calls "ultimate concern". Separate from all profane and ordinary realities, the object of the concern is understood as sacred, numinous or holy. The perception of its reality is felt as so overwhelming and valuable that all else seems insignificant, and for this reason requires total surrender. In 1957, Tillich defined his conception of faith more explicitly in his work, Dynamics of Faith.

In 1961 Tillich became one of the founding members of the Society for the Arts, Religion and Contemporary Culture, an organization with which he maintained ties for the remainder of his life. During this period, he published volume 2 of Systematic Theology and also the popular book Dynamics of Faith (both 1957). His career at Harvard lasted until 1962 when he moved to the University of Chicago, remaining a professor of theology there until his death in 1965.

Volume 3 of Systematic Theology was published in 1963. In 1964, Tillich became the first theologian to be honored in Kegley and Bretall's Library of Living Theology: "The adjective ‘great,’ in our opinion, can be applied to very few thinkers of our time, but Tillich, we are far from alone in believing, stands unquestionably amongst these few". A widely quoted critical assessment of his importance was Georgia Harkness' comment: "What Whitehead was to American philosophy, Tillich has been to American theology".

Tillich died on October 22, 1965, ten days after having a heart attack. In 1966, his ashes were interred in the Paul Tillich Park in New Harmony, Indiana. Gravestone inscription : "And he shall be like a tree planted by the rivers of water, that bringeth forth his fruit for his season, his leaf also shall not wither. And whatsoever he doeth shall prosper."

The introductory philosophy course taught by the person Tillich considered to be his best student, John Edwin Smith, "probably turned more undergraduates to the study of philosophy at Yale than all the other philosophy courses put together. His courses in philosophy of religion and American philosophy defined those fields for many years. Perhaps most important of all, he has educated a younger generation in the importance of the public life in philosophy and in how to practice philosophy publicly.” In the 1980s and 1990s the Boston University Institute for Philosophy and Religion, a leading forum dedicated to the revival of the American public tradition of philosophy and religion, flourished under the leadership of Tillich’s student and expositor Leroy S. Rouner.

Thus Tillich dismisses a literalistic Biblicism. Instead of rejecting the notion of personal God, however, Tillich sees it as a symbol that points directly to the Ground of Being. Since the Ground of Being ontologically precedes reason, it cannot be comprehended since comprehension presupposes the subject–object dichotomy. Tillich disagreed with any literal philosophical and religious statements that can be made about God. Such literal statements attempt to define God and lead not only to anthropomorphism but also to a philosophical mistake that Immanuel Kant warned against, that setting limits against the transcendent inevitably leads to contradictions. Any statements about God are simply symbolic, but these symbols are sacred in the sense that they function to participate or point to the Ground of Being. Tillich insists that anyone who participates in these symbols is empowered by the Power of Being, which overcomes and conquers nonbeing and meaninglessness.

Today, Tillich’s most observable legacy may well be that of a spiritually-oriented public intellectual and Teacher with a broad and continuing range of influence. Tillich‘s chapel sermons (especially at Union) were enthusiastically received (Tillich was known as the only faculty member of his day at Union willing to attend the revivals of Billy Graham) Tillich's students have commented on Tillich's approachability as a lecturer and his need for interaction with his audience. When Tillich was University Professor at Harvard, he was chosen as keynote speaker from among an auspicious gathering of many who had appeared on the cover of Time Magazine during its first four decades. Tillich along with his student, Psychologist Rollo May, was an early leader at the Esalen Institute. Contemporary New Age catchphrases describing God (spatially) as the "Ground of Being" and (temporally) as the "Eternal Now," in tandem with the view that God is not an entity among entities but rather is "Being-Itself"—notions which Eckhart Tolle, for Example, has invoked repeatedly throughout his career—were paradigmatically renovated by Tillich, although of course these ideas derive from Christian mystical sources as well as from ancient and medieval Theologians such as St. Augustine and St. Thomas Aquinas.