Anderson was involved in filmmaking at a young age. As a high school student, he made the 30-minute mockumentary The Dirk Diggler Story (1988), about a well-endowed male porn star (inspired by "Big" John Holmes, who also served a major inspiration for Boogie Nights).

After a brief stint as an English major at Emerson College and an even shorter time at the New York Film School, Anderson began his career as a production assistant on television movies, music videos and game shows in Los Angeles and New York. He later made Cigarettes & Coffee (1992), a short with five vignettes set in a diner (not to be confused with Jim Jarmusch's Coffee and Cigarettes.) The film was screened at the 1993 Sundance Festival, where it received considerable acclaim. In a few years, Anderson made his first full-length feature, Sydney, which was retitled Hard Eight (1996).

Anderson's breakout film Boogie Nights, revisiting his Dirk Diggler character in a full-length major motion picture, was released on October 10, 1997 to critical and commercial success. It was hailed by many critics as the "best film of the year, if not the decade,[citation needed]" and is widely considered one of the finest depictions of the porn film industry. The film revived the career of Burt Reynolds and transformed Mark Wahlberg and Julianne Moore onto the A-list of serious actors.

Anderson's next film was the ensemble piece Magnolia (1999), which tells the story of the peculiar interaction among the lives of several individuals during a single day in the San Fernando Valley, California. Interweaving nine separate yet connected storylines, Magnolia featured many intricately blocked extra-long shots, in a style quite distinct from that of mainstream Hollywood films. Magnolia was featured on over 150 critics top 10 lists of 1999, and received three Academy Award nominations, for Best Actor in a Supporting Role (Tom Cruise), Best Original Song and Best Original Screenplay.

Anderson returned with the comedy/romance feature Punch-Drunk Love (2002), starring Adam Sandler. The story centers around a beleaguered small-business owner embarking on a romantic journey with a mysterious woman (Emily Watson). Sandler won positive reviews for his role in his first major departure from the mainstream comedies which made him a star; Roger Ebert wrote that "Sandler, liberated from the constraints of formula, reveals unexpected depths as an actor. Watching this film, you can imagine him in Dennis Hopper roles. He has darkness, obsession and power."[4] The film earned only $17 million despite a $25 million budget.

Anderson's film, There Will Be Blood, was a loose adaptation of the Upton Sinclair novel Oil! The budget of the film was $25 million, and it gained $40 million in sales. It stars Daniel Day-Lewis, who won an Oscar for Best Leading Actor for his role, as well as Paul Dano who received a BAFTA nomination for Best Supporting Actor. Anderson was nominated for Best Director from the Directors Guild of America. The film also received eight Academy Award nominations, tying with No Country For Old Men for the most nominations. Anderson received nominations for Best Picture, Best Director and Best Adapted Screenplay, losing all three to the Coen Brothers for the above mentioned film.