Busey was born in Goose Creek, Texas, the son of Sadie Virginia (née Arnett), a homemaker, and Delmer Lloyd Busey, a construction design manager. He graduated from Nathan Hale High School in Tulsa, Oklahoma in 1962. While attending Pittsburg State University in Pittsburg, Kansas on a football scholarship, he became interested in acting. He then transferred to Oklahoma State University in Stillwater, Oklahoma where he quit school just one class short of graduation.

He played in a band called Carp, which released one album on Epic Records in 1969. Busey continued to play several small roles in both film and television during the 1970s. In 1975, as the character "Harvey Daley," he was the last person killed on the series Gunsmoke (in the third-to-last episode, No. 633 – "The Busters").

In 1971, Busey's wife Judy Helkenberg gave birth to their son, william Jacob "Jake" Busey. Busey and Helkenberg divorced when Jake was 19 years old. Busey has a daughter named Alectra from a previous relationship.

In 1974, Busey made his major film debut with a supporting role in Michael Cimino's buddy action caper Thunderbolt and Lightfoot, starring Clint Eastwood and Jeff Bridges.

In 1976, he was hired by Barbra Streisand and her producer-boyfriend Jon Peters to play Bobby Ritchie, road manager to Kris Kristofferson's character in the remake film A Star is Born. On the DVD commentary of the film, Streisand says Busey was great and that she had seen him on a TV series and thought he had the right qualities to play the role.

In 1978, he starred as rock legend Buddy Holly in The Buddy Holly Story with Sartain as The Big Bopper. For his performance, Busey received the greatest critical acclaim of his career and the movie earned Busey an Academy Award nomination for Best Actor and the National Society of Film Critics' Best Actor award. In the same year he also starred in the small yet acclaimed drama Straight Time and the surfing movie Big Wednesday, which is now a minor cult classic.

Busey sang the song "Stay All Night" on Saturday Night Live in March 1979 (season 4, episode 14), and on the Late Show with David Letterman in the 1990s.

In the 1980s, Busey's roles included the critically acclaimed western Barbarosa, the comedies D.C. Cab and Insignificance, and the Stephen King adaptation Silver Bullet. He played one of the primary antagonists opposite Mel Gibson and Danny Glover in the action comedy Lethal Weapon.

On December 4, 1988, Busey was severely injured in a motorcycle accident in which he was not wearing a helmet. His skull was fractured, and doctors feared he suffered permanent brain damage.

In the 1990s, he had prominent supporting roles in successful action films such as Predator 2, Point Break and Under Siege. He also appeared in Rookie of the Year, The Firm, Black Sheep, Lost Highway, and Fear and Loathing in Las Vegas.

In 1996, Busey publicly announced that he was a Christian, saying: "I am proud to tell Hollywood I am a Christian. For the first time I am now free to be myself." Busey cites the motorcycle accident, as well as a 1995 cocaine overdose, as events that strengthened his religious faith.

In 1997, Busey underwent successful surgery to remove a cancerous, plum-sized tumor from his sinus cavity. The congenital growth was found after Busey began suffering nose bleeds.

In 2003, Busey starred in a Comedy Central reality show, I'm with Busey. In 2005, he also voiced himself in an episode of The Simpsons and appeared in the popular miniseries Into the West. Busey controversially appeared in the 2006 Turkish nationalist film Valley of the Wolves: Iraq, (Kurtlar Vadisi: Irak, in Turkish), which was accused of fascism, anti-Americanism and anti-Semitism.

In 2007, he appeared as himself in a prominent recurring role on HBO's Entourage, in which he parodied his eccentric image, ultimately appearing on three episodes of the show.

During the filming of the second season of Celebrity Rehab in 2008, Busey was referred to Psychiatrist Dr. Charles Sophy. Sophy suspected that Busey's brain injury has had a greater effect on him than realized. He described it as essentially weakening his mental "filters" and causing him to speak and act impulsively. Sophy recommended Busey take valproic acid (Depakote), with which Busey agreed.

In February 2010, Busey's fiancée Steffanie Sampson gave birth to their son, Luke Sampson Busey.

In 2014, he became a Celebrity spokesperson for Amazon Fire TV. That August, he appeared in, and became the first American winner of the fourteenth series of the UK version of Celebrity Big Brother.

In 2015, Busey supported Donald Trump's 2016 presidential bid saying, "For the American people, vote for Donald Trump come election night." In 2015, he again expressed support for Trump's candidacy for President.