Rashad first became notable on the stage with a string of Broadway credits, including a role in the company of the Tony Award-winning musical Dreamgirls and in the film The Wiz (cameo as a munchkin as Phylicia Ayres Allen) as well as the original Broadway production (Dorothy). She credits her 1983 break on the ABC soap opera One Life to Live "to the presence of God within me."

She is most famous for her role Claire Huxtable on the NBC television show, The Cosby Show, which she has stated is a good portrayal of an African-American family.

When Bill Cosby returned to TV comedy in 1996 with CBS's Cosby, he again called on Rashad to play Ruth Lucas, his character's wife. Originally, the part had been cast with Telma Hopkins, but apparently the chemistry between Hopkins and Cosby was not particularly strong so he asked Rashad to take over the role.

Her first marriage, in 1972, was to a dentist, William Lancelot Bowles, Jr. They have one son, Billy, who was born the following year. This marriage ended in 1975. Rashad then married Victor Willis, a member of the Village People in 1978, however this marriage was short-lived due to Willis' cocaine abuse, and they divorced in 1980.

Phylicia married television sportscaster Ahmad Rashad on December 14, 1985, after he proposed to her during a pregame on a nationally televised Thanksgiving Day NFL game (the New York Jets vs the Detroit Lions - November 28, 1985). Their daughter, Condola Phylea Rashad, was born on December 11, 1986 in New York City. Along with her son, Billy, Rashad also has three step-children (Ahmad's children from a previous marriage): daughters Keva (born in 1970), Maiysha (born in 1974) and son Ahmad Jr. (born in 1978). The couple divorced in 2001.

Rashad is a graduate of Howard University, and later taught drama there. She is a prominent member of Alpha Kappa Alpha Sorority, Inc., the oldest historically Black collegiate sorority. She spent one year in Mexico growing up, and as a result, speaks English and Spanish fluently, as well as Portuguese. Rashad's sister is actress and dancer Debbie Allen.

In 2004, she became the first African-American actress to win the "Best Leading Actress" Award at the Tony Awards, winning for her role in the play, A Raisin in the Sun.