The human visual system streamlines visual processing by suppressing responses to textures that are similar to their surrounding context. Surround suppression is weaker in individuals with schizophrenia (ISZ); this altered use of visuospatial context may relate to the characteristic visual distortions they experience. To understand atypical surround suppression in psychotic psychopathology, we investigated neurophysiological responses in ISZ, healthy controls (HC), individuals with bipolar disorder (IBP), and first-degree relatives (ISZR/IBPR). Participants performed a contrast judgment task on a circular target with annular surrounds, with concurrent electroencephalography. Orientation-independent (untuned) suppression was estimated from responses to central targets with orthogonal surrounds; the orientation-dependence of suppression was estimated by fitting an exponential function to the increase in suppression as surrounds became more aligned with the center. ISZ exhibited weakened untuned suppression coupled with enhanced orientation-dependence of suppression. The N1 visual evoked potential was associated with the orientation-dependence of suppression, with ISZ and ISZR (but not IBP or IBPR) showing enhanced orientation-dependence of the N1. Collapsed across orientation conditions, the N1 for ISZ lacked asymmetry toward the right hemisphere; this reduction in N1 asymmetry was associated with reduced untuned suppression, real-world perceptual anomalies, and psychotic psychopathology. The overall amplitude of the N1 was reduced in ISZ and IBP. Key measures of symptomatology for ISZ are associated with reductions in untuned suppression. Increased sensitivity for ISZ to the relative orientation of suppressive surrounds is reflected in the N1 VEP, which is commonly associated with higher-level visual functions such as allocation of spatial attention or scene segmentation.