Impaired cognitive empathy (ie, understanding the emotional experiences of others) is associated with poor social functioning in schizophrenia. However, it is unclear whether the neural activity underlying cognitive empathy relates to social functioning. This study examined the neural activation supporting cognitive empathy performance and whether empathy-related activation during correctly performed trials was associated with self-reported cognitive empathy and measures of social functioning. Thirty schizophrenia outpatients and 24 controls completed a cognitive empathy paradigm during functional magnetic resonance imaging. Neural activity corresponding to correct judgments about the expected emotional expression in a social interaction was compared in schizophrenia subjects relative to control subjects. Participants also completed a self-report measure of empathy and 2 social functioning measures (social competence and social attainment). Schizophrenia subjects demonstrated significantly lower accuracy in task performance and were characterized by hypoactivation in empathy-related frontal, temporal, and parietal regions as well as hyperactivation in occipital regions compared with control subjects during accurate cognitive empathy trials. A cluster with peak activation in the supplementary motor area (SMA) extending to the anterior midcingulate cortex (aMCC) correlated with social competence and social attainment in schizophrenia subjects but not controls. These results suggest that neural correlates of cognitive empathy may be promising targets for interventions aiming to improve social functioning and that brain activation in the SMA/aMCC region could be used as a biomarker for monitoring treatment response.