He studied at the Universities of Heidelberg and Vienna, where he worked with physiologist Ernst Wilhelm von Brücke (1819–1892). After a short stay at the University of Breslau, he returned to Vienna, where in 1886 he became a lecturer at the university. In 1883 and 1884 he worked at the zoological station at Villefranche, near Nice.
He was a good friend of psychologist Sigmund Freud, who made a posthumous reference of Paneth in The Interpretation of Dreams. Freud Museum London Paneth is also remembered for his correspondence with philosopher Friedrich Nietzsche.
He was the father of chemist Friedrich Paneth (1887–1958).
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