Poundstone was born in Huntsville, AL and her family moved to Sudbury, MA when she was young (some sources incorrectly state Poundstone was born in Sudbury). Poundstone was placed in foster care in the 1970s; an experience which later led her to act as a foster mother to several children.
Poundstone dropped out of high school to pursue a show business career. She worked as a stand-up comedian in Boston for a few years and then relocated to California. In 1984, Poundstone was cast in the movie Hyperspace but she did not follow through on a potential acting career. Instead she became better known as a comedian and began appearing on several talk shows.
In 1989, she won the American Comedy Award for Best Female Stand-Up Comic. In 1990, she wrote and starred in an HBO special Cats, Cops and Stuff and subsequently won a Cable Ace Award for the show. She worked as a political correspondent for the Tonight Show during the 1992 Presidential campaign and did the same for The Rosie O’Donnell Show in 1996. In 1993, Poundstone won a second Cable Ace Award, began writing a regular column "Hey, Paula!" for Mother Jones magazine (which lasted five years), and had a variety show The Paula Poundstone Show on ABC (which lasted only two episodes). She was a regular panelist for the game shows Hollywood Squares and To Tell the Truth.
Poundstone became a foster mother in 1993. In 1997, she adopted two children, Toshia and Allison, and later a third, Thomas.