N2O is a highly potent greenhouse gas and arable soils represent its major anthropogenic source. Field-scale assessments and predictions of soil N2O emission remain uncertain and imprecise due to the episodic and microscale nature of microbial N2O production, most of which occurs within very small discrete soil volumes. Such hotspots of N2O production are often associated with decomposing plant residue. Here we quantify physical and hydrological soil characteristics that lead to strikingly accelerated N2O emissions in plant residue-induced hotspots. Results reveal a mechanism for microscale N2O emissions: water absorption by plant residue that creates unique micro-environmental conditions, markedly different from those of the bulk soil. Moisture levels within plant residue exceeded those of bulk soil by 4–10-fold and led to accelerated N2O production via microbial denitrification. The presence of large (∅ >35 μm) pores was a prerequisite for maximized hotspot N2O production and for subsequent diffusion to the atmosphere. Understanding and modelling hotspot microscale physical and hydrologic characteristics is a promising route to predict N2O emissions and thus to develop effective mitigation strategies and estimate global fluxes in a changing environment.