KCC2 is a neuron-specific K⁺-Cl⁻ co-transporter that maintains a low intracellular Cl⁻ concentration that is essential for hyperpolarizing inhibition mediated by GABA_A receptors. Deficits in KCC2 activity occur in disease states associated with pathophysiological glutamate release. However, the mechanisms by which elevated glutamate alters KCC2 function are unknown. The phosphorylation of KCC2 residue Ser940 is known to regulate its surface activity. We found that NMDA receptor activity and Ca²⁺ influx caused the dephosphorylation of Ser940 in dissociated rat neurons, leading to a loss of KCC2 function that lasted longer than 20 min. Protein phosphatase 1 mediated the dephosphorylation events of Ser940 that coincided with a deficit in hyperpolarizing GABAergic inhibition resulting from the loss of KCC2 activity. Blocking dephosphorylation of Ser940 reduced the glutamate-induced downregulation of KCC2 and substantially improved the maintenance of hyperpolarizing GABAergic inhibition. Reducing the downregulation of KCC2 therefore has therapeutic potential in the treatment of neurological disorders.