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Abstract Caregivers who are higher in dispositional empathy tend to have children with better developmental outcomes; however, few studies have considered the role of child‐directed (i.e., “parental”) empathy, which may be relevant for the caregiver–child relationship. We hypothesized that mothers’ parental empathy during their child's infancy will be a stronger predictor of their child's social‐emotional functioning as a toddler than will mothers’ dispositional empathy. We further explored whether parental and dispositional empathy have shared or distinct patterns of neural activation during a social‐cognitive movie‐watching task. In 118 mother–infant dyads, greater parental empathy assessed when infants were 6 months old was associated with more social‐emotional competencies and fewer problems in the children 1 year later, even after adjusting for dispositional empathy. In contrast, dispositional empathy was not associated with child functioning when controlling for parental empathy. In a subset of 20 mothers, insula activation was positively associated with specific facets of both dispositional and parental empathy, whereas right temporoparietal junction activation was associated only with parental empathy. Thus, dispositional and parental empathy appear to be dissociable by both brain and behavioral metrics. Parental empathy may be a viable target for interventions, especially for toddlers at risk for developing social‐emotional difficulties.