Sherwood was an indifferent student at Milton Academy and Harvard University, failing the freshman rhetoric course while performing well and happily on the Lampoon, the humour magazine, and with the Hasty Pudding club, which produced the annual college musical comedy. He left before graduation to enlist in 1917 in the Canadian Black Watch Battalion, served in France, was gassed, and was discharged in 1919.

Sherwood was drama editor of Vanity Fair (1919–20) and with his colleagues Dorothy Parker and Robert Benchley found his way to the Algonquin Round Table, the centre of a New York literary coterie. Sherwood then worked as associate editor (1920–24) and editor (1924–28) of the humour magazine Life. His first play, The Road to Rome (1927), criticizes the pointlessness of war, a recurring theme in many of his dramas. The heroes of The Petrified Forest (1935) and Idiot's Delight (1936) begin as detached cynics but recognize their own bankruptcy and sacrifice themselves for their fellowmen. In Abe Lincoln in Illinois (1939) and There Shall Be No Night (1941), in which his pacifist heroes decide to fight, Sherwood's thesis is that only by losing his life for others can a man make his own life significant. In 1938 Sherwood formed, with Maxwell Anderson, Sidney Howard, Elmer Rice, and S.N. Behrman, the Playwrights' Company, which became a major producing company.

The Lincoln play led to Sherwood's introduction to Eleanor Roosevelt and ultimately to his working for President Franklin D. Roosevelt (Roosevelt, Franklin D.) as speechwriter and adviser. Sherwood's speechwriting did much to make ghostwriting for public figures a respectable practice. Between service as special assistant to the secretary of war (1940) and to the secretary of the navy (1945), Sherwood served as director of the overseas branch of the Office of War Information (1941–44). From his wartime association with Roosevelt came much of the material for Roosevelt and Hopkins: An Intimate History. Except for his Academy Award-winning film The Best Years of Our Lives (1946), Sherwood's theatrical work after World War II was negligible.