Background Social cognitive deficits have been proposed to be among the causes of poor functional outcome in schizophrenia. Empathy, or sharing and understanding the unique emotions and experiences of other people, is one of the key elements of social cognition, and prior studies suggest that empathic processes are impaired in schizophrenia. The current study examined whether impairments in self-reported empathy were associated with poor functioning, above and beyond the influences of neurocognitive deficits and psychopathology. Methods Individuals with schizophrenia (n=46) and healthy controls (n=37) completed the Interpersonal Reactivity Index (IRI), a measure of emotional and cognitive empathy. Participants also completed a neuropsychological test battery, clinical ratings of psychopathology, and functional outcome measures assessing both functional capacity and community functioning. After testing for between-group differences, we assessed the relationships between self-reported empathy and the measures of functioning, neurocognition, and psychopathology. Regression analyses examined whether empathic variables predicted functional outcomes. Results Individuals with schizophrenia reported lower IRI scores for perspective-taking and empathic concern, and higher IRI scores for personal distress than controls. Among individuals with schizophrenia, lower perspective-taking, greater disorganized symptoms, and deficits in working memory and episodic memory were correlated with poorer functional capacity and community functioning. Lower scores for perspective-taking explained significant incremental variance in both functional capacity (ΔR2 =.09, p <.05) and community functioning (ΔR2 =.152, p <.01) after accounting for relevant neurocognitive and psychopathological variables. Conclusions Impaired perspective-taking, a component of cognitive empathy, is associated with poor functioning even after taking into account the influences of neurocognitive deficits and psychopathology. These findings support further efforts to clarify the underlying causes of empathic disturbances and suggest that treatments for these disturbances may help functional recovery in schizophrenia.