A David McGoldrick double and Oli McBurnie header secured an emphatic victory for Chris Wilder's side who climb up to sixth place.
The hosts took the lead after 18 minutes when McGoldrick reacted first to Kepa Arrizabalaga's save to score his first ever Premier League goal.
United doubled their lead just after the half an hour mark when McBurnie headed in from Enda Stevens' cross.
After the break, Chelsea had a lot of possession but failed to create many clear-cut chances and Christian Pulisic was substituted after the hour mark.
United wrapped up the game after 77 minutes with a swift counterattack which saw McGoldrick score his second goal.
Lys Mousset should have scored a fourth late on but his dinked finish went past the post.
Chelsea manager Frank Lampard was scathing in his criticism of his team's performance.
"They were better than us, physically, in the mind and with the ball. So you lose the game," he said. "They were stronger than us. You feel and hear every noise and all I could hear was Sheffield United voices. They are a good team. If you come here and perform below par this is what will happen.
"Disappointing. Mistakes. You analyse all season and review and move forward. We need to put that to bed quickly and fight for the top four. I learned a lot and I won't forget that."
McGoldrick said his barren run had not perturbed him.
"I had told the lads 'don't worry when it comes I will get a brace'," he said. "Thirty-five games in and the league table doesn't lie. That was us at our best today."