In this paper, an improved time-synchronization algorithm is proposed. The improvement of time synchronizing performance was achieved by introducing a stochastic model-based direct compensation of the disturbance effects appearing in the IEEE 1588 Precision Time Protocol (PTP)-based time synchronization system. A dynamic model of PTP clock system was obtained by reflecting the three major sources of disturbances, i.e., clock frequency drift, clock rate offset, and network noise. With the application of the dynamic model of the PTP clock system, the effects of the disturbances can be effectively eliminated in the PTP time synchronization control loop. Computer simulations are performed to verify the performance of the proposed time synchronization algorithm by applying the various types of disturbances, including network noise and clock drift. The simulation results are compared with those of other representative time synchronization algorithms, i.e., IEEE 1588 PTP algorithm and Kalman-filter-based algorithm. It is shown that the proposed algorithm improves time synchronizing performance up to 84% with respect to that of the Kalman-filter-based synchronization algorithm when simulated with colored noise type disturbances. The proposed time synchronization algorithm is expected to contribute for the realization of future Ethernet-based industry-plant monitoring and control including IEC 61850-based digital substation.