Guest was born in New York City, the son of Peter Haden-Guest, a British United Nations diplomat who later became 4th Baron Haden-Guest, and his second wife, Jean Pauline Hindes, a former vice president of casting at CBS. Guest's maternal grandparents were Jewish immigrants from Russia, while a paternal great-grandfather was Colonel Albert Goldsmid, a British Jew who founded the Jewish Lads' and Girls' Brigade. Although both of Guest's parents were born Jewish, they became atheists and Guest had no religious upbringing.

Guest spent parts of his childhood in his father's native UK. Guest attended The High School of Music & Art (New York City), studying classical music (clarinet). He later took up the mandolin and became interested in country music. He also played guitar with Arlo Guthrie, who went to the same school. Guest later began performing with bluegrass bands until he took up rock and roll.

Nearly a decade before he was born, his uncle David Guest, a lecturer and Communist Party member, was killed in the Spanish Civil War fighting in the International Brigades.

Guest began his career in theatre during the early 1970s with one his earliest professional performances being the role of Norman in Michael Weller's Moonchildren for the play's American premiere at the Arena Stage in Washington D.C. in November 1971. Guest continued with the production when it moved to Broadway in 1972. The following year he began making contributions to The National Lampoon Radio Hour for a variety of National Lampoon audio recordings. He both performed comic characters (Flash Bazbo-Space Explorer, Mr. Rogers, music critic Roger de Swans, and sleazy record company rep Ron Fields) and also wrote, arranged and performed numerous musical parodies (of Bob Dylan, James Taylor and others). He was featured alongside Chevy Chase and John Belushi in the Off-Broadway revue National Lampoon's Lemmings. One of his earliest films includes a bit part as a uniformed police officer in Death Wish starring Charles Bronson.

Guest played a small role in All In the Family as Michael's college buddy named Jim, who dated Gloria's girlfriend Debbie Priscilla Lopez and set up a blind date for Michael and Gloria. The title for that 1977 episode of was "Mike and Gloria Meet". It was a flashback of Mike and Gloria recalling their first date.

Along with Martin Short, Billy Crystal and Harry Shearer, Guest was hired as a one-year only cast member for the 1984-85 season on NBC's Saturday Night Live. Recurring characters on SNL played by Guest include Frankie, of Willie and Frankie (coworkers who recount in detail physically painful situations in which they've found themselves); Herb Minkman, a shady novelty toymaker with a brother named Al (played by Crystal); Rajeev Vindaloo, an eccentric foreign man in the same vein as Andy Kaufman's Latka character from Taxi; and Senor Cosa, a Spanish ventriloquist often seen on the recurring spoof of The Joe Franklin Show . He also experimented behind the camera with pre-filmed sketches, notably directing a documentary-style short starring Shearer and Short as synchronized swimmers. In another short film from SNL, Guest and Crystal appear as retired Negro-League baseball players, "The Rooster and the King".

He has appeared as Count Rugen in The Princess Bride, Charley Ford in The Long Riders, Lord Cromer in Mrs Henderson Presents and Dr. Stone in A Few Good Men. He had a cameo role as Dylan, a smarmy pedestrian, in the 1986 remake of The Little Shop of Horrors. As a co-writer and director, Guest made the Hollywood satire The Big Picture.

Guest's biggest role of the first two decades of his career, however, is likely that of Nigel Tufnel in the 1984 "rockumentary" film This Is Spinal Tap. Guest made his first appearance as Tufnel on the 1978 sketch comedy program The TV Show.

The experience of having made Spinal Tap would directly inform the second phase of his career. Starting in 1996, Guest began writing, directing and acting in his own series of heavily improvised films. Many of them would come to be definitive examples of what came to be known as "mockumentaries".

His frequent writing partner is Eugene Levy. Together, Levy, Guest and a small band of other actors have formed a loose repertory group, which appear across several films. These include Catherine O'Hara, Michael McKean, Parker Posey, Jane Lynch, John Michael Higgins, Harry Shearer, Jennifer Coolidge, Ed Begley, Jr. and Fred Willard. Guest and Levy write backgrounds for each of the characters and notecards for each specific scene, outlining the plot, and then leave it up to the actors to improvise the dialogue, which is supposed to result in a much more natural conversation than scripted dialogue would. Each of these movies also shares a hallmark plot development, where the movie leads up to some kind of a highly anticipated performance, or the outcome of a performance. This could reflect Guest's background in theater, and simply a kind of meta-commentary, as a real performance is of course what is being improvised for the duration. Notably, everyone who appears in these movies receives the same fee, and the same portion of profits.