Paulson was born in Tampa, Florida, the daughter of Catharine Gordon (née Dolcater) and Douglas Lyle Paulson II. She lived in South Tampa until she was 5, when her parents divorced. She spent time in Maine before moving to New York City at the age of five with her mother. She lived in Queens and Gramercy Park, before settling in Park Slope, Brooklyn. She spent her summers in Florida to visit her father. Paulson attended Manhattan's High School of Performing Arts and the American Academy of Dramatic Arts.
She dated actress Cherry Jones, the couple declaring their love for each other in 2007, during an interview with Velvetpark at Women's Event 10 for the LGBT Center of NYC. They broke up in 2009. In an interview with Broadway.com in 2013 during the revival of Talley's Folly, Paulson stated that she only dated men before her relationship with Jones, and that she has not been in a relationship since her breakup with Jones, but that she is open to relationships with women and men going forward.
- So far, none of the characters she has played (Billie Dean Howard/Lana Winters/Cordelia Foxx) have died.
- Sarah has a lisp.