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Abstract Biomaterial wound dressings, such as hydrogels, interact with host cells to regulate tissue repair. This study investigates how crosslinking of gelatin-based hydrogels influences immune and stromal cell behavior and wound healing in female mice. We observe that softer, lightly crosslinked hydrogels promote greater cellular infiltration and result in smaller scars compared to stiffer, heavily crosslinked hydrogels. Using single-cell RNA sequencing, we further show that heavily crosslinked hydrogels increase inflammation and lead to the formation of a distinct macrophage subpopulation exhibiting signs of oxidative activity and cell fusion. Conversely, lightly crosslinked hydrogels are more readily taken up by macrophages and integrated within the tissue. The physical properties differentially affect macrophage and fibroblast interactions, with heavily crosslinked hydrogels promoting pro-fibrotic fibroblast activity that drives macrophage fusion through RANKL signaling. These findings suggest that tuning the physical properties of hydrogels can guide cellular responses and improve healing, offering insights for designing better biomaterials for wound treatment.