Donaldson was born in Brooklyn, New York, the son of a piano teacher. While still in school he wrote original music for school productions, and had his first professional songs published in 1915. The following year he had a hit with "The Daughter of Rosie O'Grady". After serving in the United States Army in World War I, Donaldson was hired as a songwriter by Irving Berlin Music Company. He stayed with Berlin until 1928, producing many hit songs, then in 1928 established his own publishing company. His company was legally Donaldson, Douglas & Gumble, Inc, but all the publications had Walter Donaldson's name in large letters, and the legal name of the company in fine print.
Walter Donaldson published some 600 of his original songs. His biggest hits included "How Ya Gonna Keep 'En Down on the Farm?", "My Mammy" (a huge hit for Al Jolson), "My Little Bimbo Down on a Bamboo Isle", "My Buddy", "Carolina in the Morning", "Yes Sir, That's My Baby", "That Certain Party", "At Sundown", "My Blue Heaven", "Love Me or Leave Me", "Kansas City Kitty", "Makin' Whoopee", "Georgia", "You're Driving Me Crazy", "Little White Lies", and "I'll See You in My Dreams".
At the end of the 1920s Donaldson moved to Hollywood and worked composing and arranging music for motion pictures. His film credits include work on such pictures as Glorifying the American Girl, Suzi, The Great Ziegfeld, Panama Hattie, Follow the Boys, and Nevada.