According to the United States Census Bureau, the town has a total area of 2.5 square miles (6.5 km²), of which, 2.3 square miles (5.9 km²) of it is land and 0.2 square miles (0.6 km²) of it (8.80%) is water.
The town is located at the confluence of the Hiwassee River and Valley River.
In 1836, during the Cherokee removal known as the Trail of Tears, the United States army built Fort Butler in what is today Murphy. Fort Butler acted as the main collection point for Cherokee east of the mountains. From Fort Butler the Cherokee were taken over the mountains on the Unicoi Turnpike to the main internment camps at Fort Cass (today Charleston, Tennessee). Today the Unicoi Turnpike is known as Joe Brown Highway. The Cherokee County Historical Museum located in Murphy provides information about the Trail of Tears.
Murphy was once the terminus of the Murphy Branch rail line built in the late 1800s, although the branch no longer reaches Murphy.
Murphy was also the home of the once well-known crafts manufacturer Margaret Studios, which operated a nationwide chain of gift stores for its woodcraft products and housewares, such as lazy susans and gift trays.
There were 725 households out of which 22.2% had children under the age of 18 living with them, 41.5% are married couples/sex couples living together, 15.6% had a female householder with no husband present, and 39.3% were non-families. 36.4% of all households were made up of individuals and 21.2% had someone living alone who was 65 years of age or older. The average household size was 2.13 and the average family size was 2.71.
In the town the population was spread out with 20.3% under the age of 18, 8.9% from 18 to 24, 23.2% from 25 to 44, 23.4% from 45 to 64, and 24.2% who were 65 years of age or older. The median age was 43 years. For every 100 females there were 87.1 males. For every 100 females age 18 and over, there were 80.6 males.
The median income for a household in the town was $24,952, and the median income for a family was $35,234. Males had a median income of $30,395 versus $16,908 for females. The per capita income for the town was $16,926. About 16.7% of families and 22.9% of the population were below the poverty line, including 36.2% of those under age 18 and 21.4% of those age 65 or over.