After the events of the first film, Sonic the Hedgehog has fully settled into life in the small town of Green Hills, now living under the guardianship of Tom and Maddie Wachowski. Eager to prove himself as a true hero, Sonic chafes against Tom's advice to be patient, leading to some clumsy vigilante attempts. Meanwhile, the deranged Dr. Robotnik, who was banished to the Mushroom Planet, manages to escape with the help of a powerful new ally. Knuckles the Echidna, a warrior with immense strength, has come to Earth seeking the Master Emerald, an ancient artifact that holds unlimited power. Robotnik convinces Knuckles that Sonic is the key to finding the emerald, forging a temporary and uneasy alliance between them.

To counter this threat, Sonic is joined by another visitor from his world: Miles "Tails" Prower, a young two-tailed fox who is a brilliant mechanic and an admirer of Sonic. The pair set off on a race against time to find the hidden Master Emerald before it falls into the wrong hands. The journey takes them away from Green Hills and on a globe-trotting adventure, with key sequences set in the snowy landscapes of Siberia, where a map to the emerald is hidden in an ancient owl temple, and the bustling city of Seattle. A major subplot involves Tom and Maddie traveling to Hawaii for her sister Rachel's wedding, inadvertently leaving Sonic unsupervised for a longer period than planned, though the wedding itself becomes a chaotic battleground when Robotnik and his forces attack.

As the narrative progresses, the alliances shift. While Knuckles initially serves as a formidable antagonist driven by his duty to protect his tribe's legacy, he eventually realizes Robotnik is merely using him for his own selfish ambitions. This leads to a climactic battle where Sonic, Tails, and Knuckles must put aside their differences to stop Robotnik from using the Master Emerald to conquer the universe. The film concludes with the formation of the classic heroic trio, as Knuckles decides to stay on Earth to guard the now-shattered Master Emerald. A mid-credits scene reveals that the government agency G.U.N. is reactivated, setting up a future confrontation with Shadow the Hedgehog.