diff --git a/errors/context-in-server-component.md b/errors/context-in-server-component.md
new file mode 100644
index 000000000000000..1dcbfd8a2f7ce39
--- /dev/null
+++ b/errors/context-in-server-component.md
@@ -0,0 +1,30 @@
+# createContext in a Server Component
+
+#### Why This Error Occurred
+
+You are using `createContext` in a Server Component but it only works in Client Components.
+
+#### Possible Ways to Fix It
+
+Mark the component using `createContext` as a Client Component by adding `'use client'` at the top of the file.
+
+##### Before
+
+```jsx
+import { createContext } from 'react'
+
+const Context = createContext()
+```
+
+##### After
+
+```jsx
+'use client'
+import { createContext } from 'react'
+
+const Context = createContext()
+```
+
+### Useful Links
+
+[Server and Client Components](https://beta.nextjs.org/docs/rendering/server-and-client-components#context)
diff --git a/errors/manifest.json b/errors/manifest.json
index f2ed0ae1656e749..7273d829894c5ec 100644
--- a/errors/manifest.json
+++ b/errors/manifest.json
@@ -773,6 +773,10 @@
         {
           "title": "fast-refresh-reload",
           "path": "/errors/fast-refresh-reload.md"
+        },
+        {
+          "title": "context-in-server-component",
+          "path": "/errors/context-in-server-component.md"
         }
       ]
     }
diff --git a/packages/next/lib/format-server-error.ts b/packages/next/lib/format-server-error.ts
new file mode 100644
index 000000000000000..477a837741d308d
--- /dev/null
+++ b/packages/next/lib/format-server-error.ts
@@ -0,0 +1,12 @@
+export function formatServerError(error: Error): void {
+  if (error.message.includes('createContext is not a function')) {
+    const message =
+      'createContext only works in Client Components. Add the "use client" directive at the top of the file to use it. Read more: https://nextjs.org/docs/messages/context-in-server-component'
+    error.message = message
+    if (error.stack) {
+      const lines = error.stack.split('\n')
+      lines[0] = message
+      error.stack = lines.join('\n')
+    }
+  }
+}
diff --git a/packages/next/server/dev/next-dev-server.ts b/packages/next/server/dev/next-dev-server.ts
index 3b793ba777e35bc..336686fbe51f339 100644
--- a/packages/next/server/dev/next-dev-server.ts
+++ b/packages/next/server/dev/next-dev-server.ts
@@ -76,6 +76,7 @@ import {
 } from '../../build/utils'
 import { getDefineEnv } from '../../build/webpack-config'
 import loadJsConfig from '../../build/load-jsconfig'
+import { formatServerError } from '../../lib/format-server-error'
 
 // Load ReactDevOverlay only when needed
 let ReactDevOverlayImpl: FunctionComponent
@@ -1027,6 +1028,7 @@ export default class DevServer extends Server {
       return await super.run(req, res, parsedUrl)
     } catch (error) {
       const err = getProperError(error)
+      formatServerError(err)
       this.logErrorWithOriginalStack(err).catch(() => {})
       if (!res.sent) {
         res.statusCode = 500
diff --git a/test/development/acceptance-app/__snapshots__/server-components.test.ts.snap b/test/development/acceptance-app/__snapshots__/server-components.test.ts.snap
new file mode 100644
index 000000000000000..5c76475e0fc1da1
--- /dev/null
+++ b/test/development/acceptance-app/__snapshots__/server-components.test.ts.snap
@@ -0,0 +1,42 @@
+// Jest Snapshot v1, https://goo.gl/fbAQLP
+
+exports[`Error Overlay for server components createContext called in Server Component should show error when React.createContext is called 1`] = `
+" 1 of 1 unhandled error
+Server Error
+
+TypeError: createContext only works in Client Components. Add the \\"use client\\" directive at the top of the file to use it. Read more: https://beta.nextjs.org/docs/rendering/server-and-client-components#context
+
+This error happened while generating the page. Any console logs will be displayed in the terminal window.
+
+app/page.js (3:24) @ React
+
+  1 | 
+  2 | import React from 'react'
+> 3 | const Context = React.createContext()
+    |                ^
+  4 | export default function Page() {
+  5 |   return (
+  6 |     <>"
+`;
+
+exports[`Error Overlay for server components createContext called in Server Component should show error when React.createContext is called in external package 1`] = `
+" 1 of 1 unhandled error
+Server Error
+
+TypeError: createContext only works in Client Components. Add the \\"use client\\" directive at the top of the file to use it. Read more: https://beta.nextjs.org/docs/rendering/server-and-client-components#context
+
+This error happened while generating the page. Any console logs will be displayed in the terminal window.
+
+null"
+`;
+
+exports[`Error Overlay for server components createContext called in Server Component should show error when createContext is called in external package 1`] = `
+" 1 of 1 unhandled error
+Server Error
+
+TypeError: createContext only works in Client Components. Add the \\"use client\\" directive at the top of the file to use it. Read more: https://beta.nextjs.org/docs/rendering/server-and-client-components#context
+
+This error happened while generating the page. Any console logs will be displayed in the terminal window.
+
+null"
+`;
diff --git a/test/development/acceptance-app/server-components.test.ts b/test/development/acceptance-app/server-components.test.ts
new file mode 100644
index 000000000000000..47246440498c07c
--- /dev/null
+++ b/test/development/acceptance-app/server-components.test.ts
@@ -0,0 +1,160 @@
+/* eslint-env jest */
+import { sandbox } from './helpers'
+import { createNext, FileRef } from 'e2e-utils'
+import { NextInstance } from 'test/lib/next-modes/base'
+import path from 'path'
+
+describe('Error Overlay for server components', () => {
+  if (process.env.NEXT_TEST_REACT_VERSION === '^17') {
+    it('should skip for react v17', () => {})
+    return
+  }
+
+  let next: NextInstance
+
+  beforeAll(async () => {
+    next = await createNext({
+      files: new FileRef(path.join(__dirname, 'fixtures', 'default-template')),
+      dependencies: {
+        react: 'latest',
+        'react-dom': 'latest',
+      },
+      skipStart: true,
+    })
+  })
+  afterAll(() => next.destroy())
+
+  describe('createContext called in Server Component', () => {
+    it('should show error when React.createContext is called', async () => {
+      const { session, browser, cleanup } = await sandbox(
+        next,
+        new Map([
+          [
+            'app/page.js',
+            `
+        import React from 'react'
+        const Context = React.createContext()
+        export default function Page() {
+          return (
+            <>
+                <Context.Provider value="hello">
+                    <h1>Page</h1>
+                </Context.Provider>
+            </>
+          )
+        }`,
+          ],
+        ])
+      )
+
+      // TODO-APP: currently requires a full reload because moving from a client component to a server component isn't causing a Fast Refresh yet.
+      await browser.refresh()
+
+      expect(await session.hasRedbox(true)).toBe(true)
+      expect(await session.getRedboxSource(true)).toMatchSnapshot()
+      expect(next.cliOutput).toContain(
+        'createContext only works in Client Components'
+      )
+
+      await cleanup()
+    })
+
+    it('should show error when React.createContext is called in external package', async () => {
+      const { session, browser, cleanup } = await sandbox(
+        next,
+        new Map([
+          [
+            'node_modules/my-package/index.js',
+            `
+          const React = require('react')
+          module.exports = React.createContext()
+        `,
+          ],
+          [
+            'node_modules/my-package/package.json',
+            `
+          {
+            "name": "my-package",
+            "version": "0.0.1"
+          }
+        `,
+          ],
+          [
+            'app/page.js',
+            `
+        import Context from 'my-package'
+        export default function Page() {
+          return (
+            <>
+                <Context.Provider value="hello">
+                    <h1>Page</h1>
+                </Context.Provider>
+            </>
+          )
+        }`,
+          ],
+        ])
+      )
+
+      // TODO-APP: currently requires a full reload because moving from a client component to a server component isn't causing a Fast Refresh yet.
+      await browser.refresh()
+
+      expect(await session.hasRedbox(true)).toBe(true)
+      expect(await session.getRedboxSource(true)).toMatchSnapshot()
+      expect(next.cliOutput).toContain(
+        'createContext only works in Client Components'
+      )
+
+      await cleanup()
+    })
+
+    it('should show error when createContext is called in external package', async () => {
+      const { session, browser, cleanup } = await sandbox(
+        next,
+        new Map([
+          [
+            'node_modules/my-package/index.js',
+            `
+          const { createContext } = require('react')
+          module.exports = createContext()
+        `,
+          ],
+          [
+            'node_modules/my-package/package.json',
+            `
+          {
+            "name": "my-package",
+            "version": "0.0.1"
+          }
+        `,
+          ],
+          [
+            'app/page.js',
+            `
+        import Context from 'my-package'
+        export default function Page() {
+          return (
+            <>
+                <Context.Provider value="hello">
+                    <h1>Page</h1>
+                </Context.Provider>
+            </>
+          )
+        }`,
+          ],
+        ])
+      )
+
+      // TODO-APP: currently requires a full reload because moving from a client component to a server component isn't causing a Fast Refresh yet.
+      await browser.refresh()
+
+      expect(await session.hasRedbox(true)).toBe(true)
+      expect(await session.getRedboxSource(true)).toMatchSnapshot()
+      expect(next.cliOutput).toContain(
+        'createContext only works in Client Components'
+      )
+
+      await cleanup()
+    })
+  })
+})