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, was born in the U.S. of Albanian immigrants. James' elder brother was John who is also a famous actor. He attended Southern Illinois University and earned a degree in Speech and Theater Arts.
From 1977 to 1980 he followed John and worked with the Chicago theater group Second City. During this period he 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. 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), Red Heat (1988), K-9 (1989), Taking Care of Business (1990), Royce (1994), Retroactive (1997) and extensive voice work forf animated features.
He has been married three times and has three children. His current wife is Jennifer Sloan.