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The Southern U.S. Piedmont ranging from Virginia to Georgia underwent severe gully erosion over a century of farming mainly for cotton (1800s–1930s). Although tree succession blanketed much of this region by the middle 20th century, gully erosion still occurs, especially during wet seasons. While many studies on gully erosion have focused on soil loss, soil carbon exchange, and stormwater response, the impacts on soil moisture, groundwater, and transpiration remain under‐studied. Using a newly developed 2D hydrologic model, this study analyzes the impacts of gully erosion on hillslope hydrologic states and fluxes. Results indicate that increases in gully incision lead to reduction in groundwater table, root zone soil moisture, and transpiration. These reductions show seasonal variations, but the season when the reduction is maximum differs among the hydrologic variables. Spatially, the impacts are generally the greatest near the toe of the hillslope and reduce further away from it, although the reductions are sometimes non‐monotonic. Overall, the impacts are larger for shallow gully depths and diminish as the incision goes deeper. Lastly, the extent of impacts on a heterogeneous hillslope is found to be very different with respect to a homogeneous surrogate made of dominant soil properties. These results show that through gully erosion, the landscape not only loses soil but also a large amount of water from the subsurface. The magnitude of water loss is, however, dependent on hydrogeologic and topographic configuration of the hillslope. The results will facilitate (a) mapping of relative susceptibility of landscapes to gullying, (b) understanding of the impacts of stream manipulations such as due to dredging on hillslope eco‐hydrology, (c) prioritization of mitigation measures to prevent gullying, and (d) design of observation campaigns to assess the impacts of gullying on hydrologic response.