The world's biggest software company has not yet named a successor to Mr Ballmer, who took over from founder Bill Gates in 2000.
Mr Gates is on a committee formed to help find a successor to Mr Ballmer, who will remain with the group until a successor has been hired.
US headhunters Heidrick & Struggles International is also helping with the search.
Mr Ballmer, who is leading an overhaul of the group to become a devices and services company, said: "There is never a perfect time for this type of transition, but now is the right time. We need a chief executive who will be here longer-term for this new direction."
Mr Ballmer, 57, met Mr Gates at Harvard in 1973 and joined the group in 1980, five years after its founding.
Mr Gates said: "As a member of the succession planning committee, I'll work closely with the other members to identify a great new chief executive. We're fortunate to have Steve in his role until the new chief executive assumes these duties."
Microsoft unveiled transformation plans last month to address concerns it has not moved fast enough into mobile devices, an area dominated by Apple and Google.
Mr Ballmer was Microsoft's first business manager and has also been senior vice president of sales and support, senior vice president of systems software and vice president of marketing.
Microsoft has more than tripled revenue and doubled profits under his leadership.
After graduating from Harvard in mathematics and economics, Mr Ballmer worked for two years at Procter & Gamble as an assistant product manager and attended Stanford University Graduate School of Business before joining Microsoft.