Recent evidence suggests that the processing of observed actions may reflect an action prediction error, with more pronounced mediofrontal negative event-related potentials (ERPs) for unexpected actions. This evidence comes from an application of a false-belief task, where unexpected correct responses elicited high ERP amplitudes. An alternative interpretation is that the ERP component reflects vicarious error processing, as objectively correct responses were errors from the observed person’s perspective. In this study, we aimed to disentangle the two possibilities by adding the factor task difficulty, which varied expectations without affecting the definition of (vicarious) errors, and to explore the role of empathy in action observation. We found that the relationship between empathy and event-related potentials (ERPs) mirrored the relationship between empathy and behavioral expectancy measures. Only in the easy task condition did higher empathy lead to stronger expectancy of correct responses in the true-belief and of errors in the false-belief condition. A compatible pattern was found for an early ERP component (150–200 ms) after the observed response, with a larger negativity for error than correct responses in the true-belief and the reverse pattern in the false-belief condition, but only in highly empathic participants. We conclude that empathy facilitates the formation of expectations regarding the actions of others. These expectations then modulate the processing of observed actions, as indicated by the ERPs in the present study.