CEO Mark Zuckerberg announced the deal in a Facebook post on Monday.
"For years, we've focused on building the best experience for sharing photos with your friends and family. Now, we'll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests," Zuckerberg said in the post.
The payment will be in cash and Facebook stock and hiring its roughly 10 employees. The deal is expected to close by the end of June.
Zuckerberg said Facebook will be "building and growing Instagram independently." Instagram users will still be able to share on Facebook and Instagram separately and have separate followers on each product.
Facebook said it did not anticipate many other acquisitions, if any more at all.
The Instagram announcement comes just days after the service began offering a version for Android phones.
"Providing the best photo sharing experience is one reason why so many people love Facebook and we knew it would be worth bringing these two companies together," Zuckerberg said.
Facebook is expected to complete its initial public offering of stock next month.
The Associated Press contributed to this report.