Bobby Taylor (Robert Townsend) is a young, middle class black man living in Los Angeles who is aspiring to become a famous actor in Hollywood. He practices his lines in the bathroom, with his younger brother Stevie (Craigus R. Johnson) watching as he plays a stereotypical "jive" character as he prepares to audition for a part in 'Jivetime Jimmy's Revenge', a movie about street gangs which is so full of stereotypes that the light-skinned black actors who audition are cast as Latino gang members and have to speak with cartoonish Spanish accents. Bobby's grandmother (Helen Martin) overhears the "jive talk" and expresses disapproval. His mother (Starletta DuPois) is more supportive, and Bobby assures her that if he lands the part, their lives will change for the better.
After the audition, Bobby talks with his boss Mr. Jones, who questions Bobby's dedication to his job as a waiter at Jones's restaurant, Winky Dinky Dog, because Bobby frequently makes excuses to miss work so he can attend auditions and casting calls. A limousine arrives, and its passenger is B.B. Sanders (Brad Sanders), a famous black actor who plays a stereotypical comedy character, Batty Boy, in the popular sitcom 'There's a Bat in My House'. Ecstatic to meet a potential role model, Bobby asks Sanders how to determine whether a role is a good one. Sanders tells him that if his character does not die, then it's a good part. Sanders also says that acting is not about art, it's about making money.... "the sequel", merchandising, etc.
Bobby gets a call from his agent and learns that his audition went well, and he got a callback, but the producers want an "Eddie Murphy-type". That night, he has a nightmare in which the hack director (Eugene Robert Glazer), the hack writer (Dom Irrera), and hack casting director (Lisa Mende) hound him to become Eddie Murphy, using terms including "Murphy-esque" and "Murphonic". Waiting in line with a group of Eddie Murphy clones, Bobby starts turning into Eddie Murphy himself and then wakes up in shock.
The next day, Bobby's Winky Dinky Dog co-workers, Donald and Tiny, belittle Bobby's career as an actor and his constant excuses for missing work, telling him that he will never make it as an actor. Bobby quits his job. Later that night, he visits his uncle Ray, a singer who gave up on his chance at stardom in order to work at a "real" job to provide for his family. Bobby expresses doubts about continuing to pursue acting, but Ray encourages Bobby to follow his dreams.
During his callback, the director, writer, and casting director are thrilled at Bobby's performance, calling it "very black", and he wins the lead role. Bobby's attacks of conscience begin to manifest as daydreams based on what people around him are saying or doing, including one musical number ("Black Acting School") where white coaches teach black performers how to act "more black", and another musical number ("Sneaking into the Movies") where two young black men gain entry to a theater without paying and review films that spoof popular titles à la At the Movies, including 'Amadeus Meets Salieri', 'Chicago Jones and the Temple of Doom', 'Dirty Larry', and 'Attack of the Street Pimps'.
At home, Bobby is celebrating with his girlfriend Lydia when his grandmother comes home and the three watch a film noir. Bobby has another fantasy about playing the lead in his own film noir, 'Death of a Breakdancer'. That night, Bobby dreams of the roles that he wants to play, from a Shakespearean king, to a black superhero, to a black version of Rambo ("Rambro"). His final dream depicts him winning his fifth Oscar.
Bobby returns to the studio the next day to start filming 'Jivetime Jimmy's Revenge' with his family in attendance. His guilt about playing such a stereotypical African-American character finally overwhelms him, and Bobby quits in the middle of the shoot. Another cast member who previously complained about the stereotypical film hypocritically takes over Bobby's part, but Bobby and his family leave the set with their pride intact.
In the final scene, Bobby is completing preparations on a different set for an on camera scene that's about to begin. In an echo of his grandmother's previous admonition that there's always honest work at the post office, (in doing the so-called Hollywood Shuffle) the film ends with Bobby filming a TV commercial for the US Postal Service.