Anderson was born in Camden, Ohio, the third of seven children of Erwin M. and Emma S. Anderson. After Erwin's business failed, the family was forced to move frequently, finally settling down at Clyde, Ohio, in 1884.

Partly as a result of these misfortunes, young Sherwood found various odd jobs to help his family, which earned him the nickname "Jobby." He left school at age 14.

Anderson moved to Chicago near his brother Karl's home and worked as a manual laborer until near the turn of the century, when he enlisted in the United States Army. He was called up but did not see action in Cuba during the Spanish-American War. After the war, in 1900, he enrolled at Wittenberg University in Springfield, Ohio. Eventually he secured a job as a copywriter in Chicago and became more successful.

In 1904, he married Cornelia Lane, the daughter of a wealthy Ohio family. He fathered three children while living in Cleveland, Ohio, and later Elyria, Ohio, where he managed a mail-order business and paint manufacturing firms.

In November 1912 he suffered a mental breakdown and disappeared for four days. He was found wandering around in nearby cornfields. Soon after, he left his position as president of the Anderson Manufacturing Co. in Elyria, Ohio, and left his wife and three small children to pursue the writer's life of creativity. Anderson described the entire episode as "escaping from his materialistic existence," which garnered praise from many young writers, who used his "courage" as an example.

Anderson moved back to Chicago, working again for a publishing and advertising company. In 1916, he divorced Lane and married Tennessee Mitchell.

Anderson's first novel, Windy McPherson's Son, was published in 1916, followed, three years later, by his second major work, Marching Men. However, he is most famous for the collection of interrelated short stories, which he began writing in 1919, known as Winesburg, Ohio. He claimed that Hands, the opening story, was the first "real" story he ever wrote. Although his short stories were very successful, Anderson felt the need to write novels. In 1920, he published Poor White, which was rather successful.

In 1923, Anderson published Many Marriages, the themes of which he would carry over into much of his later writing. The novel had its detractors, but the reviews were, on the whole, positive. F. Scott Fitzgerald, for example, considered Many Marriages and Circle Of Death to be Anderson's finest novels.

Beginning in 1924, Anderson lived in the historic Pontalba Apartments (540-B St. Peter Street) adjoining Jackson Square in New Orleans. There, he and his wife entertained William Faulkner, Carl Sandburg, Edmund Wilson and other literary luminaries. Of Faulkner, in fact, he wrote his ambiguous and moving short story "A Meeting South," and, in 1925, wrote Dark Laughter, a novel rooted in his New Orleans experience. Although the book is now out of print (and was satirized by Ernest Hemingway in his novel The Torrents of Spring), it was Anderson's only bestseller.

Anderson's third marriage also failed, and he married Eleanor Copenhaver in the late 1920s. They traveled and often studied together. In the 1930s, Anderson published Death in the Woods, Puzzled America (a book of essays), and Kit Brandon, which was published in 1936.

Anderson dedicated his 1932 novel, Beyond Desire, to Copenhaver. Although he was much less influential in this final writing period, many of his more significant lines of prose were present in these works, which were generally considered sub-par compared to his other works.

"Beyond Desire", set during the 1929 Loray Mill Strike in Gastonia, NC, resulted in yet another satirical mention by Ernest Hemingway. Hemingway included a minor character in his 1937 novel To Have and Have Not who is an author. This character is working on a novel of Gastonia.

Anderson died in Panama at the age of 64 while on a cruise to South America. An autopsy revealed that he had accidentally swallowed a toothpick (presumably in a martini olive), which had perforated his colon and caused a fatal case of peritonitis. He was buried at Round Hill Cemetery in Marion, Virginia. His epitaph reads, "Life, Not Death, is the Great Adventure."

Anderson's final home, known as Ripshin, still stands in Troutdale, Virginia, and may be toured by appointment.