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Free‐living nematodes are one of the most diverse metazoan taxa in terrestrial ecosystems and are critical to the global soil carbon (C) cycling through their role in organic matter decomposition. They are highly dependent on water availability for movement, feeding, and reproduction. Projected changes in precipitation across temporal and spatial scales will affect free‐living nematodes and their contribution to C cycling with unforeseen consequences. We experimentally reduced and increased growing season precipitation for 2 years in 120 field plots at arid, semiarid, and mesic grasslands and assessed precipitation controls on nematode genus diversity, community structure, and C footprint. Increasing annual precipitation reduced nematode diversity and evenness over time at all sites, but the mechanism behind these temporal responses differed for dry and moist grasslands. In arid and semiarid sites, there was a loss of drought‐adapted rare taxa with increasing precipitation, whereas in mesic conditions increases in the population of predaceous taxa with increasing precipitation may have caused the observed reductions in dominant colonizer taxa and yielded the negative precipitation–diversity relationship. The effects of temporal changes in precipitation on all aspects of the nematode C footprint (respiration, production, and biomass C) were all dependent on the site (significant spatial × temporal precipitation interaction) and consistent with diversity responses at mesic, but not at arid and semiarid, grasslands. These results suggest that free‐living nematode biodiversity and their C footprint will respond to climate change‐driven shifts in water availability and that more frequent extreme wet years may accelerate decomposition and C turnover in semiarid and arid grasslands.