Carbon at metal nanoparticles (NPs) plays a fundamental role in heterogeneous catalysis. However, as experimental detection of small amounts of carbon is difficult, in particular when occupying subsurface sites, reaction mechanisms involving absorbed carbon are highly debated. Here, we show that the work function (WF) of metal NPs can be used as a measure of carbon adsorption and absorption, which we demonstrate by Kelvin probe force microscopy and density functional theory calculations for (111)-faceted palladium NPs (PdNPs) on graphite. Growth of PdNPs between 150 and 480 °C leads to carbon etching of the graphite steps and carbon absorption into the first subsurface layer below the NP’s facets. This strongly reduces the WF of Pd(111) by up to −1 eV. During a 1 h long postannealing at 650 °C, more carbon is etched from the graphite steps, leading to a carbon precursor structure adsorbed on the NP’s facets, as verified by scanning tunneling microscopy. The carbonaceous structures are replaced by graphene upon further annealing (1 to 2 h), followed by a decrease in the WF by ∼−1.4 eV. Similar phenomena are observed after short-time ethylene decomposition at PdNPs at 650 °C. Apart from subsurface carbon, we suggest that the large WF shifts observed experimentally could be attributed to structural defects on NP’s facets.