Wilson's family moved to Alabama in 1918, where his father found employment at the Tuskegee Institute. He played several instruments in high school, and he entered Talladega College as a music major. After a year he left college, moving to Detroit in 1929 and joining Speed Webb's band; in 1931 he moved to Chicago. Beginning in 1933, Wilson recorded and worked with Louis Armstrong (Armstrong, Louis), Jimmie Noone (Noone, Jimmie), Benny Carter (Carter, Benny), and Willie Bryant. He made a breakthrough in 1935. After playing in an informal jam session with Benny Goodman (Goodman, Benny) and Gene Krupa (Krupa, Gene), Wilson became an original member of the Benny Goodman Trio (soon to become a quartet with the addition of vibraphonist Lionel Hampton (Hampton, Lionel)), one of the first racially integrated groups in popular music. Wilson also began leading a series of small-group recordings (1935–42) produced by John Hammond (Hammond, John), including classic series with Billie Holiday (Holiday, Billie) and with Mildred Bailey (Bailey, Mildred).

Wilson started his own big band in 1939 but disbanded it in 1940 and turned to small-group work. The pianist had many reunions with Goodman through the years, but he mostly led his own trio after 1944. He also taught at the Juilliard School (1945–52), worked on radio shows (1946–55), and occasionally took part in big band nostalgia shows. He appeared in the film The Benny Goodman Story (1955).

Wilson's admitted models were Earl Hines (Hines, Earl), Fats Waller (Waller, Fats), and Art Tatum (Tatum, Art), but he went on to follow his own musical path. The critic Jon Pareles wrote after his death that he “showed how…melodies could glide and pirouette, with graceful delicacy and just a hint of the blues.” His impeccable and lightly swinging piano style was widely influential in the jazz and popular music worlds. In 1996 his book Teddy Wilson Talks Jazz (with Arie Lighthart and Humphrey van Loo) was published.