Empathy is crucial for maintaining effective social interactions. Research has identified both an early-emotional sharing and a late-cognitive component of empathy. Although considered a functionally vital social cognition process, empathy has scarcely been studied in schizophrenia (SZ). We used event-related potentials (ERPs) to study the temporal dynamics of empathic response in 19 patients with SZ and 18 matched healthy controls (HC) using an empathy for physical pain paradigm. Participants responded to pictures of hands in neutral and painful situations in an active empathic condition and one manipulated by task demands. Additionally, subjective ratings of the stimuli and empathic self-reports were collected. People with SZ had (1) decreased early-emotional ERP responses to pictures of others in pain; (2) decreased modulation by attention of late-cognitive ERP responses; (3) lower ratings of perspective taking and higher ratings of personal distress which were both related to decreased modulation of late-cognitive empathic responses; (4) a significant relationship between high affective overlap between somebody else's pain and their own pain and decreased modulation of late-cognitive empathic responses; (5) a distinct relationship between regulatory deficits in late-cognitive empathy and functioning. Patients had present but reduced early and late empathy-related ERPs. Patients also reported increased personal distress when faced with distress in others. The late ERP responses are thought to be associated with self-regulation and response modulation. The magnitude of these late responses was inversely associated with reported levels of personal distress in both patients and controls. Additionally, regulatory deficits in cognitive empathy were highly related with deficits in functioning. Decreased ability to regulate one's own emotional engagement and response to emotions of others may be an important source of distress and dysfunction in social situations for patients with schizophrenia.