When John Landis was asked how he got Aretha Franklin to appear in his 1980 film The Blues Brothers, he replied: "I asked her." The point being that the Queen of Soul had fallen out of favor and was looking for work (many other music legends - Ray Charles, Tina Turner and Roy Orbison among them - were also at career nadirs). Her fortunes were revived by her 1985 album Who's Zoomin' Who, which contained two US Top 10 hits: the title track and "Freeway of Love." It took this duet with George Michael, however, to return her to the top of the chart, where she had not been for 20 years (with "Respect").

Michael was coming off a string of hits with his group Wham!, but had not yet released his first solo album, Faith, which came out later in 1987.

This was was written by Simon Climie and Dennis Morgan; the pair met in 1983 after Morgan attended an Everly Brothers concert. It was the third song they wrote together. Morgan explained in The Billboard Book of Number One Hits: "That was one of those songs that came out of mid air – a gift from above, if you will."

The song was not originally written as a duet. Climie and Morgan pitched the song to Tina Turner as well to Aretha Franklin and Arista Records head Clive Davis. It was Davis' idea to get Franklin and George Michael to record the song as a duet. It appeared on Franklin's 1986 album Aretha.

Narada Michael Walden, who worked with Aretha on her Who's Zoomin' Who album, produced this track. He also produced the song this displaced at the top spot of the Hot 100: "Nothing's Gonna Stop Us Now" by Starship.
This made him the eighth producer in the Rock Era to score back-to-back #1 hits.

George Michael usually did his own production work; before recording this song, he had only been produced by someone else on one occasion: the "Do They Know It's Christmas?" single by Band Aid.

Michael was so used to self-producing that he had a difficult time knowing when to stop singing. Narada Michael Walden explained: "He looked at me with those innocent virgin eyes, like he'd never been told, 'you oughta stop, kid.'"

Michael wrote about his experience recording this song in his book, Bare, saying that he and Franklin recorded the song together but did their ad-libs separately. He also went on to praise Walden for being "brilliant" at getting a good atmosphere in the studio.

Michael admitted to being nervous, but he knew there was no point in trying to copy Franklin's style. "Nobody can emulate Aretha Franklin," he said. "It's stupid to try. I just tried to stay in character, keep it simple - it was very understated in comparison to what she did."

In 1987, Franklin and Michael won the Best R&B Performance By A Duo Or Group With Vocal Grammy for this song.

Aretha Franklin reflected on her collaboration with George Michael in Entertainment Weekly's 2017 tribute issue. "The first time I heard George was with Wham! and I liked it then," she said. "He had a very unique sound, very different from anything that was out there. When Clive [Davis] suggested we get together for 'I Knew You Were Waiting,' I was all ready. It reminded me of Jerry Wexler. We'd go in the studio and cut songs. If we were happy with what we recorded, Jerry would say, 'Let's wait until tomorrow. If we feel the same way that we do now, maybe we have a hit.' 'I Knew You Were Waiting' had that. Musically, it does not grow old."

Regarding the video, Franklin said, "We had a super time. He was calling most of the shots: how he wanted this, how he wanted that. My older sister, Erma, just fell for him right away. He was very friendly and personable, easy to talk to."