He was born Edward Bridge Danson III in San Diego, California, the son of Jessica MacMaster and Edward B. Danson, an archaeologist. He was raised outside of Flagstaff, Arizona. In 1961 he was sent to Kent School where he was a basketball star. He became interested in drama while attending Stanford University. He transferred to the Carnegie Institute of Technology (now known as Carnegie Mellon University in Pittsburgh, Pennsylvania), where he received his Bachelor's degree.

He is most famous for his role as bartender Sam Malone on the hit sitcom Cheers from 1982-1993. During this time he also made several movies, the most popular of which was Three Men and a Baby with Tom Selleck and Steve Guttenberg.

After Cheers, Danson starred in the sitcom Ink with his real-life wife Mary Steenburgen. In the same year, they starred as Lemuel Gulliver and his wife in an acclaimed television miniseries of Gulliver's Travels. After Ink was cancelled, Danson starred in the CBS sitcom Becker. Danson also plays himself on Curb Your Enthusiasm.

Danson was married to Casey Coates from 1977 to 1993. He is currently married to actress Mary Steenburgen whom he wed on October 7, 1995. He is stepfather to her daughter and son.

Danson, while still married to his first wife, was involved with Whoopi Goldberg. Whoopi broke off the romance soon after he appeared at a Friar's Club roast in blackface and proposed to her. However, credible reports state that Whoopi acknowledges that she wrote some of Ted's blackface skit (see Essence Jan 1997), so this was most likely not the cause of their separation.

There has been an active movement to draft Danson to run for Arizona's First Congressional District against Republican incumbent Rick Renzi. CD1 encompasses the area around Flagstaff where Danson was raised.