Michael Dorsey is an actor living and working in New York City. Most of his work seems to be on the stage; he is adept at disguises, and has a tendency to tailor his own look at the audition based on what he thinks the director wants. However, he is also very stubborn and willful; for instance, he has one confrontation with a director over whether his character can get up and move center stage for a death scene. Michael storms off the stage and quits the play, even though apparently they are well into rehearsals.
Michael lives with his best friend Jeff Slater, an eccentric playwright, and both men earn a living by waiting tables in a restaurant. As the film opens, Jeff and Michael's many friends and associates throw him a surprise birthday party, during which Michael's inability to connect with women becomes obvious. He has the tendency to lie, even about trivial things, to the point where the women see through him and avoid him. When Michael's potential love connection leaves the party with another man, Michael decides to console his neurotic friend Sandy Lester by walking her home. Sandy is nervous about an audition that she has the following day for a soap opera called "Southwest General", Michael coaches her and agrees to walk her to the audition the next day.
When they get to the studio, the director refuses to even allow Sandy to read; he says she isn't intimidating enough. When Michael tries to talk to a secretary to get ahold of a friend of his in the cast, he finds out his friend has left the cast to do a Broadway play--a role that Michael's agent, George Fields, had promised for Michael himself. Michael becomes furious and goes straight to George's office and barges in. George humors him at first but then explains to Michael that his reputation as a troublemaker has made him impossible to employ. Even directors who have hired Michael for commercials have found themselves overbudget due to Michael's inability to take direction. Michael questions George about Jeff's play that he's writing; Michael has sent George a copy of it, and George dismisses it as a pointless play that nobody will see. Michael becomes resolved; he will raise the $8000 it will take to produce Jeff's play. George disagrees and tells Michael nobody will hire him.
The next thing we see is Michael, walking down a busy New York street, in disguise as a woman. He goes to the audition for "Southwest General" and gives them the bogus name Dorothy Michaels, name dropping George as "her" agent. Dorothy meets the show's producer, Rita Marshall, who takes her in to meet Ron Carlisle, the show's director. Ron sees Dorothy and immediately dismisses her, just as he must have done to Sandy. He tells Dorothy she's not right for the part, but Dorothy presses the issue and asks why. When Ron tells her she's not intimidating enough, Dorothy questions his intentions and becomes visibly angry and loud, scolding Ron and even Rita about wanting to portray powerful women in a negative, unattractive light. Rita seems to take what Dorothy said to heart, and follows her when she storms out, asking her to come back in for a reading. Ron is put off by Dorothy's outburst, but Rita smooths it over by flattering him, telling him Dorothy was impressed with the way he communicated the part to her. Dorothy's audition is impressive, and although Ron says there is something about her that doesn't sit right with him, Rita decides to hire her for the role.
Still dressed as Dorothy, Michael goes to the Russian Tea Room, where he knows George will be having lunch, and intercepts him, insinuating himself at George's table and discreetly revealing to George that he is Michael Dorsey in disguise. George is horrified, and even more shocked that Michael managed to land a job as Dorothy. Michael borrows $1000 from George and goes shopping for a new wardrobe.
Michael has a discussion with Jeff about his strange new gig. He plans on simply doing the soap opera until he raises the money to do Jeff's play, which is intended as a vehicle for Michael and Sandy. Michael and Jeff both wonder how they'll tell Sandy that they have the money to do the play, without telling her that the producers hired a man in drag instead of her. Michael decides to lie to her, telling her a family member died. Michael and Sandy decide to celebrate by going out to dinner; while Sandy is in the shower, Michael spots a dress she owns and wants to try it on, but after he undresses, Sandy returns unexpectedly. At a loss to explain why he is in his underwear, Michael has sex with Sandy. Afterwards, they both wonder how it will change their friendship; Sandy is pessimistic and says Michael will never call her now, but Michael promises to have dinner with her the following day.
At his first day on the job as Dorothy, Michael meets his fellow cast members, including a beautiful woman named Julie Nichols. She plays a nurse on the show, and she also happens to be Ron's girlfriend. Dorothy makes a good impression on everybody, but Michael is shocked when he discovers that Dorothy has a scene where she kisses a lecherous male cast member, played by an older man named John Van Horn. Since Michael does not relish the idea of kissing another man, "Dorothy" ends up changing the scene, hitting John over the head with a folder when he tries to kiss her. Although Ron is incensed, he lets it pass, and this begins the emergence of both Dorothy and the character she is playing as a strong, no-nonsense woman.
Dorothy and Julie also begin a friendship. Although Julie sees Dorothy as simply another woman, Dorothy is really Michael, and he is extremely attracted to Julie. A series of mishaps occurs where Michael breaks plans with Sandy in order to spend time with Julie, culminating in an evening when he goes to Julie's apartment as Dorothy in order to discuss work and socialize with her. Dorothy meets Julie's infant daughter, Amy, and discovers that Julie has a fondness for drinking. She seems vaguely unhappy and in search of her own voice, something that keeps her under the spell of Ron. Dorothy sees Ron treating Julie with disrespect, not only cheating on her with other women but constantly talking down to her, clearly not taking her seriously as a person. When Julie mentions that Ron was supposed to show up for dinner one night and stood her up, Michael suddenly remembers Sandy and the dinner she had planned to make at her apartment for the both of them that night. After leaving Julie's, Michael goes home, changes out of his disguise, and goes over to Sandy's. She isn't nearly as furious with him as she should be, and even Michael points this out to her. Sandy accuses him of having an affair, having spotted Dorothy going into Michael's apartment. Michael tells her "Sandy, I'm not having an affair wtih the woman that went into my apartment. It's impossible."
As Dorothy, Michael begins to learn about what it means to be a woman, particularly the roles that men may expect women to play. When Ron talks down to Dorothy, she stands up for herself and gives it back to him, which inspires Julie and the other women on the show. Additionally, Dorothy's spunky attitude is a hit with the viewers of "Southwest General", causing the show's ratings to climb and Dorothy to become a minor celebrity.
George remains an unwilling accomplice in Michael's deception, perhaps mostly due to the fact that Michael already assocated him with Dorothy by telling everyone he's her agent. He takes Michael to a party one night and they see Julie there with Ron. Michael isn't in disguise, so neither one of them recognizes him as Dorothy. Michael makes an attempt to talk to Julie, but she ignores him, eventually throwing a drink in his face when he makes an off-color remark to her. This adds to Michael's panic about his relationship with Julie; as Dorothy, he is Julie's friend and confidante. As Michael, he doesn't stand a chance with her.
As Dorothy's tenure with "Southwest General" is about to end, Julie invites her to come with her to upstate New York, where her widowed father still lives on the farm where Julie grew up. Against Jeff's advice, Michael goes with Julie, maintaining his Dorothy disguise all weekend. Dorothy meets Julie's father, Les, a conservative but kind man who enjoys the laid back life he leads on the farm. Julie tells Dorothy that Les hasn't dated any women since her mother passed away, and it becomes clear that he takes a strong liking to Dorothy. Dorothy manages to politely avoid Les's advances.
When they return to New York, the precarious position that Michael is in begins to implode. Rita tells Dorothy that because of her popularity with the viewers, they will be picking up their option to keep her on the show for another season. Michael is very upset to get that news, since he wants to leave the show in order to do Jeff's play, but George tells him there is nothing he can do about it, the studio has the legal option to keep Dorothy on. As Michael is about to go to bed, he gets a frantic call from Julie asking Dorothy if she can come over and sit for Amy while Julie goes out with Ron; Julie has decided to break up with Ron, and she tells Dorothy that she herself is the inspiration for Julie's newfound assertiveness. After a few harrowing hours where Amy refuses to cooperate with Dorothy, Julie returns, despondent about the breakup, and in a moment of vulnerability, she tells Dorothy that she treasures their friendship more than anything, but feels like she wants something she just can't have. In response, Michael leans in and tries to kiss Julie, but Julie of course does not know Dorothy is really a man, and she assumes Dorothy is a lesbian who just made a pass at her. Confused and upset, she is clearly distraught that her new best friend has made a pass at her, when the phone rings. It is Les, and he asks if he can speak to Dorothy, inviting her to a downtown club for drinks and dancing. What Les really does is propose marriage to Dorothy, giving her an engagement ring. Dorothy tells him she needs time to think it over and leaves.
Michael returns home by cab and finds John Van Horn waiting outside his apartment for Dorothy. When she refuses to invite him up, he starts singing loudly and attracts the attention of neighbors, so Dorothy invites him up anyway. After making several attempts to seduce Dorothy, John is horrified when Jeff returns home unexpectedly. Embarassed, he leaves. Jeff turns to Michael and says "You slut!" The final strand to unravel is Sandy, who shows up right after, banging on the front door to be let in. Michael hurriedly takes a shower, removing his makeup and Dorothy disguise, and Sandy demands to know why he hasn't been returning her phone calls. Michael attempts to lie to her again, giving her a box of chocolates that Les sent Dorothy, but her forgets there is a note attached. Sandy reads it and it says "Thank you for a wonderful night in front of the fire, Les." Cornered, Michael finally comes clean with Sandy, but all he manages to get out is "I'm in love with another woman" before Sandy plunges into hysteria. Even so, Sandy tells Michael that she could handle the fact that he was in love with another woman, but she does not like being lied to. Michael has already come to the realization that he has been behaving like Ron, rationalizing his lies and callous treatment of women, which may explain why Michael does not have any real relationship with a woman at all.
Things come to a head when, the next day at the studio, one of the reels of the show is accidentally destroyed and the cast is forced to do a crucial scene live on the air. Before they go on, Dorothy visits Julie's dressing room. Julie tells Dorothy that she cannot see her anymore. Since Julie now thinks another woman is in love with her, she can't lead Dorothy on by pretending to be friends when she knows Dorothy wants more from her. When they go on the air, Ron and Rita watch nervously, hoping that the scene comes off alright. They are horrified when Dorothy starts veering wildly from the script, taking her character into a long speech about why she came to Southwest General. After concocting a crazy story about disfiguring diseases, exile in foreign countries, and other nonsensical things, Dorothy takes off her wig and reveals herself to be a man underneath, weaving her own real story into that of her character, as if her unmasking was always intended to be part of the Southwest General plot all along. Sandy and Les react in horror, watching the episode from their TV sets, while the cast themselves are shocked to discover that Dorothy is actually a man. Julie walks up to Michael and angrily hits him in the stomach.
Some time after the fallout, Michael drives upstate and finds Les in the bar where he likes to hang out, presumably to return the ring and try to make amends. Les is hostile at first, but eventually softens enough to allow Michael to apologize. Michael explains why he took the role as Dorothy, and that he never meant to hurt anybody. Les and Michael eventually lighten up enough to joke about the situation, and Les admits that Michael was good company. Michael tells Les that he is in love with Julie, but Les says Julie never mentions him.
The final scene occurs when Michael attempts to see Julie. He waits for her outside the TV studio, but Julie spots him and walks away. Michael chases after her and tries to make small talk with her. Julie tries to avoid him but finally allows him to talk to her. Michael tells Julie what he told Les, that he only did it for the money, and that he couldn't help falling in love with Julie. He also says that he was a better person as Dorothy than he ever was as himself. He asks her to give him a chance, since they were already good friends. Julie admits that she misses Dorothy, but Michael reminds her that he is Dorothy. "I just gotta learn to do it without the dress," he tells her. Julie softens and smiles, playfully asking him if she can borrow one of Dorothy's outfits. In the final shot, they walk down the street together talking and laughing, and after they get about a block away, Julie happily puts her arm around Michael.