Sonic Hedgehog (Shh) is a secreted morphogen that regulates embryonic development. After removal of the signal peptide, Shh is processed to the mature, active form through autocleavage and a series of lipid modifications, including the attachment of palmitate. Covalent attachment of palmitate to the N-terminal cysteine of Shh is catalyzed by Hedgehog acyltransferase (Hhat) and is critical for proper signaling. The sequences within Shh that are responsible for palmitoylation by Hhat are not known. Here we show that the first six amino acids of mature Shh (CGPGRG) are sufficient for Hhat-mediated palmitoylation. Alanine scanning mutagenesis was used to determine the role of each amino acid and the positional sequence requirement in a cell-based Shh palmitoylation assay. Mutation of residues in the GPGR sequence to Ala had no effect on palmitoylation, provided that a positively charged residue was present within the first seven residues. The N-terminal position exhibited a strong but not exclusive requirement for Cys. Constructs with an N-terminal Ala were not palmitoylated. However, an N-terminal Ser served as a substrate for Hhat, but not the Drosophila melanogaster ortholog Rasp, highlighting a critical difference between the mammalian and fly enzymes. These findings define residues and regions within Shh that are necessary for its recognition as a substrate for Hhat-mediated palmitoylation. Finally, we report the results of a bioinformatics screen to identify other potential Hhat substrates encoded in the human genome.