In 1982, McDormand earned an M.F.A. from the Yale University School of Drama. She was roommates with Holly Hunter at the time. Her first professional acting job was in Trinidad, performing in a play written by poet Derek Walcott and funded by the MacArthur Foundation.

McDormand's film debut was in Joel and Ethan Coen's first film, 1985's Blood Simple. In 1985, McDormand, the Coen brothers, Holly Hunter, and director Sam Raimi shared a house in the Bronx.

In addition to her early film roles, McDormand played "Connie Chapman" in the fifth season of the television police drama Hill Street Blues. In 1988, she played Stella Kowalski in a stage production of Tennessee Williams' A Streetcar Named Desire, for which she was nominated for a Tony Award. Frances McDormand is an associate member of the experimental theater company The Wooster Group.

McDormand appeared in several theatrical and television roles during the 1980s, 1990s and 2000s. She has gained renown and critical acclaim for her dramatic work, and is a respected actress, having been nominated for Academy Awards four times. In 1988, she was nominated for an Best Actress in a Supporting Role for Mississippi Burning; in 1996, she won the Academy award for Best Actress for her performance as police chief Marge Gunderson in Fargo; in 2000, she earned her second nomination for Best Actress in a Supporting Role for her portrayal of a concerned mother in Almost Famous. Also for Almost Famous, she won the Best Supporting Actress nod from the Broadcast Film Critics Association, the Chicago Film Critics Association, Los Angeles Film Critics Association, San Diego Film Critics Society, Southeastern Film Critics Association, and the Florida Film Critics Circle. For her role in Wonder Boys (2000), she won Best Supporting Actress from the Broadcast Film Critics Association, the Florida Film Critics Circle, and the Los Angeles Film Critics Association.

In 2006, McDormand received her third Best Supporting Actress nod for her performance in 2005's North Country, although she lost to Rachel Weisz. She also had a role in the film Friends with Money, a dark comedy co-starring Jennifer Aniston, Catherine Keener and Joan Cusack, and directed by Nicole Holofcener.

McDormand has been in a relationship with director Joel Coen since 1984, and the two married in 1994, as well as adopted a son from Paraguay, Pedro McDormand Coen. They live in New York City. McDormand has starred in several of the Coen Brothers films, including a minor appearance in Miller's Crossing and the award winning lead role in Fargo.