Daniel Hillard is a voice actor living in San Francisco, California, who quits his job at an animation studio over a questionable script. Though a devoted and well-meaning father to his three young children, Lydia, Chris and Natalie, Daniel is an unreliable husband. When Daniel throws a boisterous birthday party for his son Chris, despite his wife, Miranda, saying he couldn't have one because of his bad report card, Miranda becomes furious with him and seeks a divorce. At their first custody hearing, the judge grants Miranda custody of the children, since Daniel has neither a residence nor a job.
Daniel soon learns that Miranda intends to hire a housekeeper and surreptitiously alters her classifieds form when she refuses to let him take care of the children. He then calls Miranda several times, using his voice acting to trick her into thinking that terrible job applicants are calling. He then calls as a British-accented nanny, whom he dubs "Mrs. Euphegenia Doubtfire". Impressed with her alleged qualifications, Miranda invites "Mrs. Doubtfire" for an interview. Daniel enlists his brother Frank, a makeup artist, and his partner Jack to transform him into the character.
After being further impressed by the interview, Miranda hires Mrs. Doubtfire. The children initially struggle to adjust to Mrs. Doubtfire's strict methods, but they soon begin to thrive, becoming happier and doing better in school, while Miranda is able to heal her distant relationship with her children and she and Mrs. Doubtfire become good friends. Daniel has to learn several skills to play the role convincingly, such as cooking and cleaning, and also improves himself. However, despite impressing Miranda greatly with his newfound maturity, Daniel realizes he has indirectly created another barrier, as when he asks to look after the children, Miranda insists she could never dismiss Mrs. Doubtfire, as the family's lives have been made so much better by "her." One night, Chris and Lydia learn that Mrs. Doubtfire is their father in disguise, but after the initial panic and learning why he did it, agree to keep it a secret from everyone.
Daniel also takes a job at a TV station. CEO Jonathan Lundy sees Daniel clowning around with toy dinosaurs on the set of an unsuccessful children's program on the cusp of cancellation. Impressed with Daniel's creativity, Lundy invites him to dinner at Bridge's Restaurant on the coming Friday night in order for Daniel to pitch ideas as a new host. Miranda, meanwhile, expects Mrs. Doubtfire to attend a birthday dinner arranged by romantic interest Stuart Dunmire scheduled at the same time and place.
Unable to reschedule either appointment, Daniel goes to the restaurant and tries to rotate between both dinners, changing in and out of the Mrs. Doubtfire costume in the restroom. He consumes several alcoholic beverages between the two tables and becomes tipsy. He forgets to change out of the Mrs. Doubtfire costume before returning to Lundy's table and seasons pepper (an ingredient Stuart is allergic to) on Stuart's order. When Lundy questions the costume, Daniel covers for his mistake by explaining that his alter ego is his idea for a television persona, impressing Lundy. At Miranda's table, Stuart starts choking on the pepper. Out of regret, Daniel, still in the Mrs. Doubtfire costume, administers the Heimlich maneuver. During the struggle, Daniel's mask rips off, revealing his identity. Horrified and furious, Miranda storms out of the restaurant with the children.
At their next custody hearing, despite Daniel demonstrating he has a job and a suitable home, the judge, although sympathetic, is disturbed by Daniel's behavior and grants Miranda full custody, with Daniel limited to supervised visitation once a week. Without Mrs. Doubtfire, the children again become withdrawn and depressed, and even Miranda admits their lives were so much better with "her". However, they are delighted when they see Daniel dressed as Mrs. Doubtfire hosting his own television program, "Euphegenia's House", which becomes a hit across several American cities. Miranda pays a visit to Daniel after he wraps up one episode. Congratulating him on his success, she admits that things were better when he was involved, so she decides to appeal the custody ruling. Later the kids are greeted by Daniel, revealed as their new babysitter, undisguised and without supervision. They head out as Miranda watches a Euphegenia's House episode where Mrs. Doubtfire answers a letter from a little girl whose parents are divorcing, saying no matter what arrangements families have, love will prevail.