Joel Coen and Ethan Coen came up with the story while working on The Hudsucker Proxy (1994). While filming the scene in the barbershop, the Coens saw a prop poster of 1940s haircuts and began developing a story about the barber who cut the hair in the poster.
In his 2017 book, The Coen Brothers, Ian Nathan reports that Joel Coen called Billy Bob Thornton to say the brothers had a film for him. What's it about, Thornton asked. "It's about a barber who wants to be in the dry-cleaning business," was the reply. "I'll take it," said Thornton, who had been a long-time fan of the Coens, having famously remarked, "They just don't suck."
Because he trusted the quality of Joel Coen and Ethan Coen's work, Billy Bob Thornton agreed to do the movie before even reading the script.
The movie was filmed in color, then printed in black and white by special processing. At least one print was released with the first reel in normal color due to an error at the lab.
Billy Bob Thornton jokingly made it look like Ed Crane had an erection in one of the scenes where he's watching Birdy Abundas playing the piano. Only one of the prop guys noticed during production. When the Coen Brothers later found out, they made it clear that Ed would not be aroused in the scene.