Understanding hydrogen incorporation into palladium requires detailed knowledge of surface and subsurface structure and atomic interactions as surface hydrogen is being embedded. Using density functional theory (DFT), we examine the energies of hydrogen layers of varying coverage adsorbed on Pd(111). We find that H-H and H-Pd interactions promote the formation of the well-known 3×3 phases but also favor an unreported (3 × 3) phase at high H coverages for which we present experimental evidence. We relate the stability of isolated H vacancies of the (3 × 3) phase to the need of H2 molecules to access bare Pd before they can dissociate. Following higher hydrogen dosage, we observe initial steps of hydride formation, starting with small clusters of subsurface hydrogen. The interaction between H and Pd is complicated by the persistent presence of carbon at the surface. X-ray photoelectron spectroscopy experiments show that trace amounts of carbon, emerging from the Pd bulk despite many surface cleaning cycles, become mobile enough to repopulate the C-depleted surface at temperatures above 200K. When exposed to hydrogen, these surface carbon atoms react to form benzene, as evidenced by scanning tunneling microscopy observations interpreted with DFT.