The “thin-shallow-wet-dry” irrigation (TIR) method is one of water-saving irrigation methods of rice cultivation. The effects of TIR method on water use efficiency (WUE) of rice and soil microbial activities were investigated under three rates of nitrogen (N) compared to conventional flood irrigation. TIR method decreased total water consumption (21.7–23.5%) and increased rice WUE (17.8–27.2%). At high N level, TIR method significantly increased the number of nitrifying bacteria and the activities of catalase, invertase and urease in soil at the jointing, booting and milky stages, and the number of denitrifying bacteria at the milky stage. Increased N rate increased grain yield and water consumption simultaneously, and middle N level increased microbial biomass carbon (MBC) and nitrogen, the number of nitrifying and denitrifying bacteria and the activities of catalase, urease and invertase. Thus TIR method at middle N level can effectively improve rice WUE and soil MBC and enzyme activity.