Social cognition develops in the context of reciprocal social interaction. However, most neuroimaging studies of mentalizing have used noninteractive tasks that may fail to capture important aspects of real‐world mentalizing. In adults, social‐interactive context modulates activity in regions linked to social cognition and reward, but few interactive studies have been done with children. The current fMRI study examines children aged 8–12 using a novel paradigm in which children believed they were interacting online with a peer. We compared mental and non‐mental state reasoning about a live partner (Peer) versus a story character (Character), testing the effects of mentalizing and social interaction in a 2 × 2 design. Mental versus Non‐Mental reasoning engaged regions identified in prior mentalizing studies, including the temporoparietal junction, superior temporal sulcus, and dorsomedial prefrontal cortex. Moreover, peer interaction, even in conditions without explicit mentalizing demands, activated many of the same mentalizing regions. Peer interaction also activated areas outside the traditional mentalizing network, including the reward system. Our results demonstrate that social interaction engages multiple neural systems during middle childhood and contribute further evidence that social‐interactive paradigms are needed to fully capture how the brain supports social processing in the real world.