Sayles was born in Schenectady, New York. He was raised Catholic and took to labeling himself "a Catholic atheist". Both of Sayles' parents were of half Irish descent.

Like Martin Scorsese and James Cameron, among others, Sayles got his start in film working with Roger Corman. Sayles went on to fund his first film, Return of the Secaucus 7, with $30,000 he had in the bank from writing scripts for Corman; he set the film in a large house so that he did not have to travel to or get permits for different locations, set it over a three-day weekend to limit costume changes, and wrote it about people his age so that he could have his friends act in it.

In 1983, after Sayles's films Baby It's You (starring Rosanna Arquette) and Lianna (a sympathetic story in which a married woman becomes discontented with her marriage after falling in love with another woman), Sayles received a MacArthur Fellowship for $40,000 a year for a five-year term. Sayles used the money to fund The Brother from Another Planet, a film about a black, three-toed slave who escapes from another planet and finds himself at home among the people of Harlem in New York City, largely because he is incapable of speaking.

In 1989, he created and wrote the pilot episode for the short-lived television show Shannon's Deal about a down-and-out Philadelphia lawyer played by Jamey Sheridan. Sayles received a 1990 Edgar Award for his teleplay for the pilot. The show only lasted 13 episodes before being cancelled in 1991.

Sayles has funded most of his films by writing genre scripts such as Piranha, The Howling and The Challenge. Once such script for an unproduced film called Night Skies became the genesis of the project that would eventually become the film E.T. the Extra-Terrestrial.

In deciding whether to take the job, Sayles reports that he concerns himself mostly with whether there is the germ of an idea for a movie that he would want to watch. Sayles gets the rest of his funding by working as a script doctor; he has done rewrites for Apollo 13 and Mimic, among others, and finds the job rewarding since he gets to help other writers tell their stories and also meet other directors and watch how they work. Some of his more well-known films include Lone Star, Passion Fish, The Secret of Roan Inish, and Matewan. His films tend to be politically aware; social concerns are a theme running through most of his work. He also serves on the advisory board for the Austin Film Society.

In November 1997, the National Film Preservation Board of the United States announced that Return of the Secaucus 7 would be one of the 25 films selected that year for preservation in the National Film Registry at the Library of Congress, bringing the total at the time to 225. At the end of 2001, the total number of films preserved was only 325.

Several actors frequently work with Sayles, most notably Chris Cooper, David Strathairn, and Gordon Clapp, each of whom have appeared in at least four Sayles films.