Mullally was born in Los Angeles, California, the daughter of Martha (née Palmer), a model, and Carter Mullally, Jr., an actor who was a contract player with Paramount Pictures during the 1950s. She is of Irish descent. Mullally moved to her father's native Oklahoma City, Oklahoma, at the age of seven. She studied ballet from the age of six and performed in a ballet company during high school. She spent her summers in Los Angeles because of her mother's work. Following her graduation from Casady School, she attended Northwestern University, where she majored in English Literature and Art History. She became active in local theater and eventually left college without graduating. She worked in Chicago theater for six years.

Mullally moved to Los Angeles in 1981, after just two weeks as a client with the William Morris Agency, she began appearing in bit parts in films and television, such as Murder She Wrote with Angela Lansbury She made her series debut in The Ellen BurstynShow and guest starred in popular sitcoms such as Seinfeld, Frasier, Wings, Ned and Stacey (with future Will & Grace castmate Debra Messing although the pair did not appear in any scenes together), Mad About You, and Just Shoot Me! She had auditioned for Elaine's character on Seinfeld but Julia Louis-dreyfusgot the job.

In 1998, Mullally landed the role of Karen Walker, Grace Adler's shrill-voiced, pill-popping, eccentric assistant in the NBC sitcom Will & Grace. She won Emmy Awards in 2000 and 2006 for Outstanding Supporting Actress in a Comedy Series (and was also nominated in 2001, 2002, 2003, 2004, and 2005), and also won three Screen Actors Guild Awards. In addition, Mullally earned four Golden Globe Award nominations for the show. Although she did not win the Emmy in 2005, she did, based on votes from viewers, win the "Emmy Idol" award for singing the Green Acres theme song, in character as Karen, alongside Donald Trump Although her own voice has a fairly high range, she developed an exaggeratedly high one for the character. However, in the pilot episode of the series, she used her real voice. Will & Grace ended in May 2006.

In 2005, Mullally "discovered" comedian and actor Bill Haderwhile he was with the troupe "Animals From The Future," bringing Hader to the attention of Saturday Night Live producer Lorne Michaels.

Following Will & Grace, Mullally hosted her own talk show, The Megan Mullally Show, which was launched in September 2006. It was canceled in early 2007 due to poor ratings.

Mullally was the host of the 2006 TV Land Awards. She has been featured in advertisements for M&M's candies and the website CheapTickets. Mullally had a voice cameo as the mother of Neil Patrick Harris' character's mother on a November 2006 episode of the CBS sitcom How I Met Your Mother, and guest starred on Campus Ladies. She was in one episode of the drama Boston Legal in 2007.

In previews of the new fourth season of Kathy Griffin's Kathy Griffin: My Life on the D-List it is shown Mullally will appear in one of the episodes.

Her feature film debut was as a call girl in Risky Business and has parts in Stealing Harvard, Anywhere but Here and the Martin Lawrence comedy Rebound. She also is a voice actress who has done work on several cartoons, such as the 1990s version The Flintstones, Batman: The Animated Series, King of the Hill, the Disney feature film Teacher's Pet, and the Dreamworks film Bee Movie. She also had a role in the 2001 film "Monkeybone" as the sister of a character played by Brendan Fraser