Global paddy soil is the primary source of methane, a potent greenhouse gas. It is therefore highly important to understand the carbon cycling in paddy soil. Microbial reduction of iron, which is widely found in paddy soil, is likely coupled with the oxidation of dissolved organic matter (DOM) and suppresses methanogenesis. However, little is known about the biotransformation of small molecular DOM accumulated under flooded conditions and the effect of iron reduction on the biotransformation pathway. Here, we carried out anaerobic incubation experiments using field-collected samples amended with ferrihydrite and different short-chain fatty acids. Our results showed that less than 20% of short-chain fatty acids were mineralized and released to the atmosphere. Using Fourier transform ion cyclotron resonance mass spectrometry, we further found that a large number of recalcitrant molecules were produced during microbial consumption of these short-chain fatty acids. Moreover, the biotransformation efficiency of short-chain fatty acids decreased with the increasing length of carbon chains. Ferrihydrite addition promoted microbial assimilation of short-chain fatty acids as well as enhanced the activation and biotransformation of indigenous stable carbon in the soil replenished with formate. This study demonstrates the significance of ferrihydrite in the biotransformation of labile DOM and promotes a more comprehensive understanding of the coupling of iron reduction and carbon cycling in paddy soils.