Methylobacterium sp. XJLW converts formaldehyde into methanol and formic acid via a Cannizzaro reaction in response to environmental formaldehyde stress. Methanol is further assimilated without formaldehyde or formic acid formation, whereas formic acid accumulates without undergoing further metabolism. Synthetic biology-based biotransformation of methanol to generate additional products can potentially achieve carbon neutrality. However, practical applications are hampered by limitations such as formaldehyde tolerance. In this study, we aimed to explore the specific mechanism of strain XJLW in response to formaldehyde stress. Thus, a transcriptomic analysis of XJLW under formaldehyde treatment was performed, revealing changes in the expression of specific genes related to one-carbon metabolism. Central metabolic genes were downregulated, whereas metabolic bypass genes were upregulated to maintain methanol assimilation in XJLW’s response to formaldehyde treatment. In total, 100 genes potentially related to methyl transfer were identified. The function of only one gene, RS27765, was similar to that of glyA, which encodes a methyltransferase involved in one-carbon metabolism. The double-mutant strain, lacking RS27765 and glyA, lost its ability to grow in methanol, whereas the single-mutant strain, lacking only one of these genes, still grew in methanol. Co-expression of RS27765 and RS31205 (YscQ/HrcQ type III secretion apparatus protein) enabled Escherichia coli BL21 (DE3) to effectively degrade methanol. Using protein sequence analysis and molecular docking, we proposed a model wherein RS27765 is necessary for cell growth by using methanol generated via formaldehyde cannizzaro reaction. This process enables direct assimilation of methanol without producing formaldehyde and formic acid as intermediate metabolites. The RS27765 gene cluster, in conjunction with metabolic bypass genes, constitutes a novel auxiliary pathway facilitating formaldehyde stress tolerance in the strain.