The use of microalgae for nutrient recovery from wastewater and subsequent conversion of the harvested biomass into fertilizers offers a sustainable approach towards creating a circular economy. Nonetheless, the process of drying the harvested microalgae represents an additional cost, and its impact on soil nutrient cycling compared to wet algal biomass is not thoroughly understood. To investigate this, a 56-day soil incubation experiment was conducted to compare the effects of wet and dried Scenedesmus sp. microalgae on soil chemistry, microbial biomass, CO2 respiration, and bacterial community diversity. The experiment also included control treatments with glucose, glucose + ammonium nitrate, and no fertilizer addition. The Illumina Mi-Seq platform was used to profile the bacterial community and in-silico analysis was performed to assess the functional genes involved in N and C cycling processes. The maximum CO2 respiration and microbial biomass carbon (MBC) concentration of dried microalgae treatment were 17% and 38% higher than those of paste microalgae treatment, respectively. NH4+ and NO3− released slowly and through decomposition of microalgae by soil microorganisms as compared to synthetic fertilizer control. The results indicate that heterotrophic nitrification may contribute to nitrate production for both microalgae amendments, as evidenced by low amoA gene abundance and a decrease in ammonium with an increase in nitrate concentration. Additionally, dissimilatory nitrate reduction to ammonium (DNRA) may be contributing to ammonium production in the wet microalgae amendment, as indicated by an increase in nrfA gene and ammonium concentration. This is a significant finding because DNRA leads to N retention in agricultural soils instead of N loss via nitrification and denitrification. Thus, further processing the microalgae through drying or dewetting may not be favorable for fertilizer production as the wet microalgae appeared to promote DNRA and N retention.