Payment for ecosystem services (PES) is a widely accepted policy tool for achieving environmental conservation and socioeconomic development goals. However, the mechanisms through which PES programs affect socioeconomic outcomes remain elusive. Here, we use a framework which integrates links between PES programs, livelihood activities, and socioeconomic outcomes, to determine how China’s Grain-to-Green Program (GTGP) has affected the incomes of participating households in the Yanhe watershed of the Loess Plateau. The results show that although the total effect of the GTGP on household income is not statistically significant, there are still two significant pathways. Through the analysis we found that implementation of the GTGP significantly increased the participations in local non-farm jobs, which leads to increased household incomes. Based on our findings, we suggest several ways of improving the socioeconomic outcomes of the GTGP through increasing non-farm work benefit of participating households, maximizing the positive effect of economic forest, and reducing the reliance of households on income from crop production. Our study provides a template for revealing the underlying pathways to socioeconomic outcomes of PES programs – crucial knowledge if we are to design and implement better PES programs and achieve the desired environmental conservation and poverty reduction goals.