Neocortical inhibitory neurons exhibit remarkably diverse morphology, physiological properties and connectivity. Genetic access to molecularly defined subtypes of inhibitory neurons has aided their functional characterization in recent years. These studies have established that, instead of simply balancing excitatory neuron activity, inhibitory neurons actively shape excitatory circuits in a subtype-specific manner. We review the emerging view that inhibitory neuron subtypes perform context-dependent modulation of excitatory activity, as well as regulate experience-dependent plasticity of excitatory circuits. We then review the roles of neuromodulators in regulating the subtype-specific functions of inhibitory neurons. Finally, we discuss the idea that dysfunctions of inhibitory neuron subtypes may be responsible for various aspects of neurological disorders.