diff --git a/src/execution/service.ts b/src/execution/service.ts
index b2eecfd57..e8dfe9e60 100644
--- a/src/execution/service.ts
+++ b/src/execution/service.ts
@@ -684,11 +684,7 @@ export class ServiceScriptExecution extends BaseExecutionWithCommand<ServiceScri
   private _onChildExited() {
     switch (this._state.id) {
       case 'stopping': {
-        this._state = {
-          id: 'stopped',
-        };
-        this._terminated.resolve({ok: true, value: undefined});
-        this._servicesNotNeeded.resolve();
+        this._enterStoppedState();
         this._logger.log({
           script: this._config,
           type: 'info',
@@ -697,7 +693,7 @@ export class ServiceScriptExecution extends BaseExecutionWithCommand<ServiceScri
         return;
       }
       case 'started': {
-        this._fail({
+        this._enterFailedState({
           script: this._config,
           type: 'failure',
           reason: 'service-exited-unexpectedly',
@@ -705,7 +701,7 @@ export class ServiceScriptExecution extends BaseExecutionWithCommand<ServiceScri
         return;
       }
       case 'failing': {
-        this._fail(this._state.failure);
+        this._enterFailedState(this._state.failure);
         return;
       }
       case 'failed':
@@ -745,7 +741,7 @@ export class ServiceScriptExecution extends BaseExecutionWithCommand<ServiceScri
       case 'stoppingAdoptee':
       case 'unstarted':
       case 'depsStarting': {
-        this._state = {id: 'stopped'};
+        this._enterStoppedState();
         return;
       }
       case 'stopping':
@@ -761,7 +757,13 @@ export class ServiceScriptExecution extends BaseExecutionWithCommand<ServiceScri
     }
   }
 
-  private _fail(failure: Failure) {
+  private _enterStoppedState() {
+    this._state = {id: 'stopped'};
+    this._terminated.resolve({ok: true, value: undefined});
+    this._servicesNotNeeded.resolve();
+  }
+
+  private _enterFailedState(failure: Failure) {
     this._state = {
       id: 'failed',
       failure,
diff --git a/src/test/service.test.ts b/src/test/service.test.ts
index d084ae93c..ce381f8e3 100644
--- a/src/test/service.test.ts
+++ b/src/test/service.test.ts
@@ -823,4 +823,78 @@ test(
   })
 );
 
+test(
+  'caching with service dependencies works in watch mode',
+  timeout(async ({rig}) => {
+    // consumer
+    //    |
+    //    v
+    // service
+
+    const consumer = await rig.newCommand();
+    const service = await rig.newCommand();
+    await rig.writeAtomic({
+      'package.json': {
+        scripts: {
+          consumer: 'wireit',
+          service: 'wireit',
+        },
+        wireit: {
+          consumer: {
+            command: consumer.command,
+            dependencies: ['service'],
+            files: [],
+            output: [],
+          },
+          service: {
+            command: service.command,
+            service: true,
+            files: ['input'],
+          },
+        },
+      },
+    });
+
+    await rig.write('input', 'A');
+    const wireit = rig.exec('npm run consumer --watch');
+
+    // 1st run with input A. Runs.
+    {
+      const serviceInv = await service.nextInvocation();
+      const consumerInv1 = await consumer.nextInvocation();
+      consumerInv1.exit(0);
+      await serviceInv.closed;
+      await wireit.waitForLog(/Watching for file changes/);
+      assert.equal(service.numInvocations, 1);
+      assert.equal(consumer.numInvocations, 1);
+    }
+
+    // 2nd run with input B. Runs.
+    {
+      await rig.write('input', 'B');
+      const serviceInv = await service.nextInvocation();
+      const consumerInv1 = await consumer.nextInvocation();
+      consumerInv1.exit(0);
+      await serviceInv.closed;
+      await wireit.waitForLog(/Watching for file changes/);
+      assert.equal(service.numInvocations, 2);
+      assert.equal(consumer.numInvocations, 2);
+    }
+
+    // 3rd run with input A. Restored from cache.
+    {
+      await rig.write('input', 'A');
+      await wireit.waitForLog(/Restored from cache/);
+      await wireit.waitForLog(/Watching for file changes/);
+      assert.equal(service.numInvocations, 2);
+      assert.equal(consumer.numInvocations, 2);
+    }
+
+    wireit.kill();
+    await wireit.exit;
+    assert.equal(service.numInvocations, 2);
+    assert.equal(consumer.numInvocations, 2);
+  })
+);
+
 test.run();