Billy Behan is an impoverished Irish American fifteen-year-old living in The Bronx with his schizophrenic mother, who supports the family by working at a laundry. Billy runs with a gang of other boys his age, whose antics primarily consist of seeking out places in the city where they can spy on the successful mobsters whom they idolize. One afternoon, the boys are present when Dutch Schultz—who has gone in hiding to avoid being arrested for tax evasion—arrives to inspect a warehouse being used to store bootlegged beer. Billy demonstrates his skill at juggling for Schultz, who calls him a "capable boy" and gives him money. Billy, taking the event as a sign, tracks down an office inthe Bronx where Schultz runs an illegal gambling operation and infiltrates it by pretending to be a delivery boy. Otto Berman, Schultz's accountant and second in command, is impressed with Billy's cunning and hires him on as a janitor, using the position to begin mentoring Billy in the ways of mafia life. Over the course of the summer, Billy grows close to both Schultz, who maintains control over his crumbling empire through violence and intimidation, and Berman, who is attempting to steer organized crime towards more legitimate business ventures.
Near the end of the summer, Berman tasks Billy with spying on the gangsters who regularly congregate at a nightclub Schultz owns. During his tenure there, Billy witnesses one of Schultz's lieutenants, Bo Weinberg, meeting with a pair of men affiliated with the Italian mafia. Based on Billy's information, Schultz has Weinberg and his girlfriend, a socialite named Drew Preston, kidnapped at gunpoint. Billy follows Schultz and Weinberg out to a riverboat, where he witnesses Schultz torture and murder Weinberg by throwing him into the East River with his feet encased in cement. Before Weinberg dies, he makes Billy promise him to protect Drew.
Schultz assaults Drew, then takes her and Billy back to her apartment with instructions to retrieve her belongings. While Drew gathers her things, Billy learns that her husband, Harvey, is a closeted homosexual, and that they share a marriage of convenience in which Drew acts as a beard in exchange for financial security and the opportunity to thrill seek by dating gangsters. Seeing Schultz as simply the latest in a line of sexual conquests, Drew agrees to become his moll in exchange for her life.
Schultz amicably turns himself in to the authorities, based on the condition that he be allowed to choose the site of his trial. Schultz and his attorney, Dixie Davis, choose a small farming community in upstate New York, then arrive several weeks before jury selection and buy an entire floor of the local hotel. Schultz presents himself as a philanthropic businessman unjustly persecuted by the government, Billy as an orphan boy whom he has taken under his wing as a business apprentice, and Drew as a governess employed to supervise Billy's education. Schultz uses his fortune to buy several townspeople out of debt, and cements his position within the community by having himself and Billy become members of the local Catholic church. Billy, who is already Catholic, is enrolled in Sunday school; during registration, Billy, believing that he is now solidly a part of the gang, gives himself the nickname "Bathgate" after the street where his apartment is located. Schultz, meanwhile, who is religiously Jewish, must be baptized into the church. Lucky Luciano, the most powerful gangster in the Italian mob, drives in from Manhattan to stand as Schultz's godfather, an act which Schultz believes will also earn him high standing with the Italian mob.
One afternoon, Drew gets drunk and asks Billy to tell her how Bo died. Afterwards, she attempts suicide by jumping off of cliff; the attempt fails when she lands in a pond. Billy finds her and helps her back to the hotel. Sensing Billy's ambivalence towards her treatment by Schultz, Drew seduces him and gains his confidence. Concurrently, she also drives a wedge between Schultz and the rest of his men by instructing him in elocution and etiquette, causing him to become more critical of his men's uncivilized behavior. Berman, realizing that Schultz is in danger of losing his empire, instructs Billy to take Drew to the races at Saratoga Springs during the trial, ostensibly to hide her scandalous presence from the press, as Schultz is married. While they're away, Billy and Drew begin an affair. At Saratoga, Billy realizes that the real reason Berman sent Drew to Saratoga was to have her killed, as she has become a liability. Billy arranges for ostentatious flowers, chocolates, and other gifts to be delivered to Drew during the race to draw attention to her, making it impossible for the two hitmen sent by Berman to seize her without being noticed. The ruse buys enough time for Harvey, whom Billy contacted beforehand, to collect her from the race and take her out of the country before the hitmen can act.
Schultz is acquitted of tax evasion in New York, but federal prosecutor Thomas E. Dewey announces plans to charge Schultz with federal tax evasion. Schultz flees to Newark and sets up an office in the back room of a chophouse. Against Berman's council, Schultz decides to assassinate Dewey and orders Billy to shadow him to and from work for a week in order to determine the best time to murder him. Word reaches Luciano, who orders Schultz to call off the assassination. During a meeting, Billy informs Schultz that, during their time together, Drew informed him that Bo was making plans with Luciano for Bo to take over his empire if and when Schultz were to be incarcerated and killed. An enraged Schultz decides to declare war on Luciano by going ahead with the assassination attempt.
The night before the assassination is to take place, gunmen storm the chophouse and shoot Schultz, Berman, and Schultz's bodyguards. Billy is small enough that he is able to escape out of a bathroom window. Billy returns, where the dying Berman gives Billy the code to Schultz's personal safe. Billy later accompanies Schultz to the hospital and sits with him while he dies. In his death throes, Schultz babbles a stream of consciousness monologue, portions of which lead Billy to the location of his hidden fortune.
Billy finds and hides Schultz's money; Luciano calls on Billy to ask him about the location of Schultz's fortune, but Billy manipulates him into believing that Dixie Davis knows where the money is hidden. Luciano dismisses Billy with the offer to potentially work for him one day.
The next year, a messenger from Drew arrives at Billy's home with an infant son, the product of his and Drew's time in Saratoga. Now a father, Billy decides to use Schultz's money to fulfill Berman's dream of organized criminals becoming legitimate businessman, and founds a corporation that enjoys financial success into the 1980s.