Signal and noise correlations, a prominent feature of cortical activity, reflect the structure and function of networks during sensory processing. However, in addition to reflecting network properties, correlations are also shaped by intrinsic neuronal mechanisms. Here we show that spike threshold transforms correlations by creating nonlinear interactions between signal and noise inputs; even when input noise correlation is constant, spiking noise correlation varies with both the strength and correlation of signal inputs. We characterize these effects systematically in vitro in mice and demonstrate their impact on sensory processing in vivo in gerbils. We also find that the effects of nonlinear correlation transfer on cortical responses are stronger in the synchronized state than in the desynchronized state, and show that they can be reproduced and understood in a model with a simple threshold nonlinearity. Since these effects arise from an intrinsic neuronal property, they are likely to be present across sensory systems and, thus, our results are a critical step toward a general understanding of how correlated spiking relates to the structure and function of cortical networks.