He was born in Chicago, Illinois but grew up in Wheaton, Illinois. He is the third of four children of Adam Belushi, an Albanian immigrant who left his native Qytezë village in 1934 at the age of 15, and Agnes, who was born in the U.S., and whose parents were also Albanian immigrants. James' elder brother, John, was also a famous actor. James attended Southern Illinois University Carbondale and earned a degree in Speech and Theater Arts.

From 1977 to 1980 he followed John and worked with the Chicago theater group The Second City. At one point, John called a director at Second City and instructed her that James wasn't to use any of John's old material. During this period James also made his television debut in the 1978 flop Who's Watching the Kids and also had a microscopic part in Brian De Palma's The Fury.

His first larger role was in Michael Mann's Thief (1981). From 1983 to 1985 he wrote and appeared on Saturday Night Live. On SNL, characters included Hank Rippy from Hello, Trudy!, and That White Guy.

He rose to greater prominence with his supporting roles in About Last Night... and Salvador (both 1986) which gave him the opportunity for lead roles. He has starred in films including Real Men (1987), The Principal (1987), Red Heat (1988), Homer and Eddie, K-9 (1989), Taking Care of Business (1990), Mr. Destiny (1990), Wild Palms (1993), Royce (1994), Retroactive (1997) Return To Me and (2006) Hoodwinked and The Wild as Benn the Squirell. James has also done extensive voice work for animated features including Geppetto in the 2002 movie version of Pinocchio.

James currently stars in the sitcom According to Jim which debuted in October 2001.

He has been married three times and has three children. He married his current wife Jennifer Sloan on May 2, 1998.

In 2003, He released the album "Have Love, Will Travel" with fellow SNL alumnus Dan Aykroyd, and particated in an accompaning tour. He also performs at various venues nationwide as Zee Blues with Elwood Blues (who is played by Aykroyd) in an updated version of Dan Aykroyd and John Belushi's popular Blues Brothers act.

On November 2, 2004 Belushi filed a lawsuit against actress and neighbor Julie Newmar. Belushi claims that Newmar has intentionally been trying to cause him distress and drive him from his home by doing things such as destroying his property, blaring loud music directed at his home and bad-mouthing him to neighbors. Newmar claims she is the victim of Belushi and has been suffering for many years, ever since he moved next-door to her. In February 2006, the two announced they have settled their differences amicably and Newmar will appear in an upcoming episode of According to Jim referring to the feud.