The microstructure that governs the nature of carbon steel is determined by the combination of iron and carbon. Ferrite and austenite differ in their arrangements of iron atoms, and they differ from cementite with respect to iron and carbon bonding. In this work, we combine structural studies (X-ray diffraction, scanning electron microscopy, and atomic force microscopy) and synchrotron-based in-situ X-ray photoelectron spectroscopy (XPS) to demonstrate the behavior of the carbon in carbon steel using a thermal annealing process conducted from room temperature to 900 °C in an ultrahigh-vacuum chamber. In situ XPS experiments revealed not only that the chemical states varied depending on depth from the surface but also that the carbide changed into the C-solute phase at temperatures between than 300–600 °C. Our findings provide important insights into the subtle balance of interactions involving the properties of steel that differ between the surface and bulk phases, offering new opportunities to engineer the properties of carbon steel.