Impairments in social cognition—including recognition of facial expressions—are increasingly recognised as a core deficit in schizophrenia. It remains unclear whether other aspects of face processing (such as identity recognition) are also impaired, and whether such deficits can be attributed to more general cognitive difficulties. Moreover, while the majority of past studies have used picture-based tasks to assess face recognition, literature suggests that video-based tasks elicit different neural activations and have greater ecological validity. This study aimed to characterise face processing using video-based stimuli in psychiatric inpatients with and without psychosis. Symptom correlates of face processing impairments were also examined. Eighty-six psychiatric inpatients and twenty healthy controls completed a series of tasks using video-based stimuli. These included two emotion recognition tasks, two non-emotional facial identity recognition tasks, and a non-face control task. Symptoms were assessed using the Positive and Negative Syndrome Scale. Schizophrenia and bipolar disorder groups were significantly impaired on the emotion-processing tasks and the non-face task compared to healthy controls and patients without psychosis. Patients with other forms of psychosis performed intermediately. Groups did not differ in non-emotional face processing. Positive symptoms of psychosis correlated directly with both emotion-processing performance and non-face discrimination across patients. We found that identity processing performance was inversely associated with cognition-related symptoms only. Findings suggest that deficits in emotion-processing reflect symptom pathology independent of diagnosis. Emotion-processing deficits in schizophrenia may be better accounted for by task-relevant factors—such as attention—that are not specific to emotion processing.