Nano zero-valent iron biochar (nZVI–BC), an environmentally-friendly functional material prepared from waste biomass, has attracted extensive attention. This material has potential to solve the problem of biomass conversion. However, the lack of a method of converting biomass to the nZVI–BC involved in biomass modification and pyrolysis hinders its further production and application. In this study, we introduced the green solvent polyethylene glycol 400 (PEG400) to a biomass (rice straw (RS)) modification system with FeCl3·6H2O, and activated RS was prepared to nZVI–BC by one-step pyrolysis. The addition of PEG400 promoted the hydrolysis of iron ion and improved the RS surface structure, promoting the attachment of Fe2O3 to the RS surface. The mild activation conditions with temperatures of 60, 80, and 100 °C and a time of 0.5 h prevented the excessive loss of the lignin component and were conducive to the formation of carbon skeletons. Amorphous carbon and Fe2O3 were subjected to redox reactions to form nZVI–BC with the assistance of reducing gas produced from pyrolysis. In addition, the prepared nZVI–BC was tested for dye (Congo red) removal, showing rapid absorption (70.60% at 5 min) and high catalysis in advanced oxidation (75.67% at 5 min, 90.00% at 60 min). This work proposed a novel mechanistic strategy for preparing nZVI–BC and set a foundation for its scaled production and application.