Molecular dynamics simulations are used to investigate the atomic effects of carbon (C) addition in Fe on the martensitic phase transformation in the presence of pre-existing defects such as stacking faults and twin boundaries. The pre-existing defect structures in Fe-C alloys have the same effect on the atomistic mechanisms of martensitic transformation as in pure Fe. However, C addition decreases the martensitic transformation temperature. This effect is captured by characterizing three parameters at the atomic level: atomic shear stresses, atomic energy, and total energy as a function of temperature for face-centered-cubic (fcc) and body-centered-cubic (bcc) phases. The thermodynamic effect of fcc phase stabilization by C addition is revealed by the atomic energy at a particular temperature and total energy as a function of temperature. The barrier for fcc-to-bcc transformation is revealed by analysis of atomic shear stresses. The analysis indicates that addition of C increases the atomic shear stresses for atomic displacements during martensitic transformation, which in turn decreases the martensitic transformation temperature.