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Background While the prevalence of multidrug-resistant (MDR) tuberculosis (TB) is high among children in the Western Cape of South Africa, the psychosocial implications of treatment for children with MDR-TB remain poorly understood. We sought to explore how MDR-TB and its treatment impact children on an individual, familial, and social level. Methods Semi-structured interviews were conducted with 20 children and caregivers purposively sampled from a prospective clinical cohort of children. The sample was stratified by age at the start of treatment (children >10 years, and 5-10 years). Caregiver proxy interviews were conducted with younger children, supplemented with child interviews; older children were interviewed directly, supplemented with caregiver proxy interviews. Data were analysed using grounded theory. Results Findings revealed pill volume and adverse effects produced significant physical, psychological and academic disturbances in children. Adverse effects related to the medication were important obstacles to treatment adherence. While there appear to be no long-lasting effects in younger children, a few older children showed evidence of persisting internalised stigma. Caregivers suffered important treatment-related financial and psychological costs. Community support, notably through the continued involvement of children in strong social networks, promoted resilience among children and their families. Conclusions We found that the current treatment regimen for childhood MDR-TB has significant psychological, academic, and financial impacts on children and their families. There is a need for psychosocial support of children and caregivers to mitigate the negative effects of community stigma, and to manage the stressors associated with chronic illness. Electronic supplementary material The online version of this article (doi:10.1186/1471-2334-14-426) contains supplementary material, which is available to authorized users.