Hematite (Fe2O3) is a well-known oxide semiconductor suitable for photoelectrochemical (PEC) water splitting and industry gas sensing. It is widely known that Sn doping of Fe2O3 can enhance the device performance, yet the underlying mechanism remains elusive. In this work, we determine the relationship between electronic structure, optical properties, and PEC activity of Sn-doped Fe2O3 by studying highly crystalline, well-controlled thin films prepared by pulsed laser deposition (PLD). We show that Sn doping substantially increases the n-type conductivity of Fe2O3, and the conduction mechanism is better described by a small-polaron hopping (SPH) model. Only 0.2% Sn doping significantly reduces the activation energy barrier for SPH conduction from at least 0.5 eV for undoped Fe2O3 to 0.14 eV for doped ones. A combination of X-ray photoemission, X-ray absorption spectroscopy, and DFT calculations reveals that the Fermi level gradually shifts toward the conduction band minimum with Sn doping. A localized Fe2+-like gap state is observed at the top of the valence band, accounting for the SPH conduction. Interestingly, different from the literature, only 0.2% Sn doping in Fe2O3 significantly improves the PEC activity, while more Sn decreases it. The improved PEC activity is partially attributed to an increased band bending potential which facilitates the charge separation at the space charge region. The reduced activation energy barrier for SPH will facilitate the transport of photoexcited carriers for the enhanced PEC, which is of interest for further carrier dynamics study.