Although critical for host defense, innate immune cells are also pathologic drivers of acute respiratory distress syndrome (ARDS). Innate immune dynamics during Coronavirus Disease 2019 (COVID-19) ARDS, compared to ARDS from other respiratory pathogens, is unclear. Moreover, mechanisms underlying the beneficial effects of dexamethasone during severe COVID-19 remain elusive. Using single-cell RNA sequencing and plasma proteomics, we discovered that, compared to bacterial ARDS, COVID-19 was associated with expansion of distinct neutrophil states characterized by interferon (IFN) and prostaglandin signaling. Dexamethasone during severe COVID-19 affected circulating neutrophils, altered IFN^active neutrophils, downregulated interferon-stimulated genes and activated IL-1R2⁺ neutrophils. Dexamethasone also expanded immunosuppressive immature neutrophils and remodeled cellular interactions by changing neutrophils from information receivers into information providers. Male patients had higher proportions of IFN^active neutrophils and preferential steroid-induced immature neutrophil expansion, potentially affecting outcomes. Our single-cell atlas (see ‘Data availability’ section) defines COVID-19-enriched neutrophil states and molecular mechanisms of dexamethasone action to develop targeted immunotherapies for severe COVID-19.