Cholinergic modulation of cortex powerfully influences information processing and brain states, causing robust desynchronization of local field potentials and strong decorrelation of responses between neurons. We found that intracortical cholinergic inputs to mouse visual cortex specifically and differentially drive a defined cortical microcircuit: they facilitate somatostatin-expressing (SOM) inhibitory neurons that in turn inhibit parvalbumin-expressing inhibitory neurons and pyramidal neurons. Selective optogenetic inhibition of SOM responses blocked desynchronization and decorrelation, demonstrating that direct cholinergic activation of SOM neurons is necessary for this phenomenon. Optogenetic inhibition of vasoactive intestinal peptide-expressing neurons did not block desynchronization, despite these neurons being activated at high levels of cholinergic drive. Direct optogenetic SOM activation, independent of cholinergic modulation, was sufficient to induce desynchronization. Together, these findings demonstrate a mechanistic basis for temporal structure in cortical populations and the crucial role of neuromodulatory drive in specific inhibitory-excitatory circuits in actively shaping the dynamics of neuronal activity.