Both of his parents worked as domestic servants and were extremely poor. They had a total of four children. Schikaneder's father died shortly after the forth, at which time his mother returned to Regensburg, making a living selling religious articles from a wooden shed adjacent to the local cathedral. Schikaneder received his education at a Jesuit school in Regensburg as well as training in the local cathedral as a singer. As a young adult he began to pursue his career in the theater, appearing with Andreas Schopf's theatrical troupe around 1773 and performing opera, farce, and Singspiel. Schikaneder danced at a court ballet in Innsbruck in 1774, and the following year his Singspiel Die Lyranten was debuted there. This was a great success, and was performed frequently in the following years. Schikaneder was the librettist, composer, and principal singer, a versatility he would continue to exhibit throughout his career.

In the fall of 1780, the Schikaneder troupe made an extended stay in Salzburg, and at that time Schikaneder became a family friend of the Mozarts. As Mozart was about to depart Salzburg for the premiere in Munich of his opera Idomeneo, he promised before leaving to write a recitative and aria for Schikaneder. The composition was intended for Schikaneder's production of Die zwey schlaflosen Nächte by August Werthes. From November 1784 to February 1785, Schikaneder collaborated with theater director Hubert Kumpf for a series of performances at the Kärntnertortheater in Vienna. He had been invited to do so by the Emperor Joseph II, who had seen him perform the previous year in Pressburg. The Vienna run was admired by critics and attracted large audiences, often including the Emperor and his court. Schikaneder and Kumpf opened their season with a revival of Mozart's Die Entführung aus dem Serail.

During Easter 1788, the troupe run by Johann Friedel and Eleonore Schikaneder had settled as the resident troupe at the Theater auf der Wieden, located in a suburb of Vienna. Friedel died on 31 March 1789, leaving his entire estate to Eleonore, and the theater was closed. Following this, Eleonore offered reconciliation to Schikaneder, who moved to Vienna in May to start a new company in the same theater in partnership with her. The new company was financed by Joseph von Bauernfeld, a Masonic brother of Mozart. The new company was successful, and Die Entführung aus dem Serail again became part of the repertory. The series of fairy-tale operas at the Theater auf der Wieden culminated in the September 1791 premiere of Die Zauberflöte (The Magic Flute), with music by Mozart and libretto by Schikaneder. Schikaneder took the role of Papageno—a character reflecting the Hanswurst tradition, and thus suited to his skills—at the premiere. Die Zauberflöte was a great success at its premiere, frequently selling out and receiving over a hundred performances at the Theater auf der Wieden during its first few months of performance. Schikaneder continued to produce the opera at intervals for the rest of his career in Vienna.

Mozart died only a few weeks after the premiere, on 5 December 1791. Schikaneder was distraught at the news and felt the loss sharply. He evidently put on a benefit performance of Die Zauberflöte for Mozart's widow Constanze, who at the time faced a difficult financial situation.

Schikaneder's career continued in the same theater during the years that followed. He continued to write works in which he played the main role and which achieved popular success.  Although many of the works performed were popular successes, the expenses of Schikaneder's elaborate productions were high, and the company gradually fell into debt. Schikaneder persuaded Bartholomäus Zitterbarth, a wealthy merchant, to become his partner and take on the debt. As a result, the company was saved. Schikaneder and his new partner Zitterbarth planned together to construct a grand new theater for the company. Zitterbarth purchased the land for the new theater on the other side of the Wien River, in another suburb only a few hundred meters away from the Theater auf der Wieden. Schikaneder still had in his possession a document from the late Emperor Joseph II permitting him to construct a new theater. In 1800, he had an audience with the now-reigning Franz, which resulted in a renewal of the license. Construction of the new theater, which was named the Theater an der Wien, began in April 1800. It opened 13 June 1801. There, Schikaneder continued his tradition of expensive and financially risky theatrical spectacle.

By 1804, Schikaneder's career had taken a downward turn; his productions could not bring in enough customers to cover their cost. He sold the Theater an der Wien to a consortium of nobles and left Vienna for the provinces, working in Brno and Steyr. Following economic problems caused by war and an 1811 currency devaluation, Schikaneder lost most of his fortune. During a journey to Budapest in 1812 to take a new post, he became insane. He died impoverished in Vienna on 21 September 1812 at age 61.