It’s Halloween in Bikini Bottom, and SpongeBob is cleaning the dishes in the Krusty Krab at the end of the work day. He is frightened by the creepy door closing and a word (or possibly a message) reading “BOO” on the order slips.
After he finishes, he begins to run away, but Mr. Krabs stops him and asks him if he wants to hear his “annual scary story,” and he then does. He tells a story of “The Flying Dutchman,” a ghost who steals souls on Halloween. Squidward, dressed up as the Flying Dutchman, appears behind SpongeBob, saying that he’ll steal his soul, terrifying him. SpongeBob, who has a reputation for being easily scared, and is nicknamed “SpongeBob ScaredyPants,” rushes home, and is scared by everything he sees on the way. After being scared by Patrick, he asks him for help. They make a “Flying Dutchman” costume, but it fails to scare anyone. SpongeBob realizes that a real ghost has a round head, and that he has a square one. Patrick shaves SpongeBob’s head, making it round. Believing themselves to be scary, SpongeBob and Patrick go around town attempting to scare people, and believe themselves to be successful in doing so, although their “victims” are simply confused by their antics.
They then go to the roof of the Krusty Krab where a Halloween party is taking place, turn off all the lights, and lower SpongeBob with a rope, with Patrick providing the voice of the “Dutchman,” which initially terrifies everyone. However, when a jellyfish stings Patrick, whom the rope is tied to, he starts running around in pain, causing SpongeBob to fly around uncontrollably, exposing his true identity.
Everybody starts laughing at SpongeBob, but soon the real Flying Dutchman appears. He explains to them how offended he is by people dressing up as him for Halloween, and that SpongeBob’s costume is the worst of all. He says that SpongeBob is the “straw that broke the camel’s back,” and that he will now steal the souls of everyone present. He takes off SpongeBob’s costume, which revealed that his brain is exposed as a result of Patrick’s shaving. Subsequently, everyone runs away, including the Dutchman, leaving SpongeBob satisfied to finally have succeeded in scaring people. Patrick comments on SpongeBob’s “pink hat,” and SpongeBob explains that it’s not a hat, it’s his brain, and Patrick screams and runs away. SpongeBob says “Don’t worry, it grows back!” and the episode ends.