Although microglial activation is widely found in amyotrophic lateral sclerosis (ALS) and frontotemporal dementia (FTD), the underlying mechanism(s) are poorly understood. Here, using human-induced pluripotent stem cell-derived microglia-like cells (hiPSC-MG) harboring the most common ALS/FTD mutation (C9orf72, mC9-MG), gene-corrected isogenic controls (isoC9-MG), and C9orf72 knockout hiPSC-MG (C9KO-MG), we show that reduced C9ORF72 protein is associated with impaired phagocytosis and an exaggerated immune response upon stimulation with lipopolysaccharide. Analysis of the C9ORF72 interactome revealed that C9ORF72 interacts with regulators of autophagy and functional studies showed impaired initiation of autophagy in mC9-MG and C9KO-MG. Coculture studies with motor neurons (MNs) demonstrated that the autophagy deficit in mC9-MG drives increased vulnerability of mC9-MNs to excitotoxic stimulus. Pharmacological activation of autophagy ameliorated both cell-autonomous functional deficits in hiPSC-MG and MN death in MG-MN coculture. Together, these findings reveal an important role for C9ORF72 in regulating immune homeostasis and identify dysregulation in myeloid cells as a contributor to neurodegeneration in ALS/FTD.