AbstractLateral subsurface flow plays an essential role in sustaining the terrestrial ecosystem, but it is not explicitly represented in most Earth System Models. In this study, we implemented an explicit lateral saturated flow model into the E3SM land model (ELM). The model explicitly describes lateral flow in the saturated zone by representing, for each model grid, an idealized hillslope consisting of five hydrologically connected soil columns. We conducted three model experiments driven by 0.125° atmospheric forcing data during 1980–2015 over California using models of the default ELM, a modified version of ELM to enhance infiltration, and the model with the lateral saturated flow model. The simulated runoff, evapotranspiration, and terrestrial water storage anomaly (TWSA) from the three simulations were evaluated against available observations, and the model explicitly representing lateral flow performs best. The new model produces greater gridcell‐averaged evapotranspiration especially over the mountainous regions with moderate relief and seasonally dry climates. Most importantly, it improves the modeled seasonal variations, interannual variabilities, and the recent decadal decline of TWSA. Many of these improvements can be attributed to the enhanced ecosystem resilience to droughts as demonstrated by transpiration increases caused by lateral flow. Model sensitivity experiments suggest that subsurface runoff is most sensitive to the ratio between horizontal and vertical saturated hydraulic conductivity, followed by hillslope planforms (convergent, divergent, and uniform), number of columns, and lower boundary conditions. Future work should effectively characterize hillslopes in global models and explore the long‐term influences of lateral water movement on modeled biogeochemical cycle.