Merge layer in JOSM

You do not need to technically merge your new data layer to a data layer which you have downloaded from the server. All your new data in your layer will be merged to the main database on upload. Note that by "merged" I mean (in simple words) that e.g. if you draw a new street where there is already a street in the main database, then you will have two streets placed on top of each other while being not connected to each other. Since we usually want no duplicate object and want a connected street network (for routing), you usually would want to avoid this.

Usually you rather want to first download data from the server, then edit this layer and then upload it.

An option is this (which you possibly described in your question): You download the existing data, start a new data layer and do your additions, merge both layers, connect streets (and similar objects) and check that you did not create any duplicated objects, and then upload the merged layer.