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Merchant was born in Hanham, Avon, the son of nursery nurse Jane Elaine (nee Hibbs) and insurance representative Ronald John Merchant. He attended Hanham High School and later the University of Warwick in Coventry from 1993 to 1996, where he received a 2:1 Bachelor of Arts degree in Film and Literature. Merchant was a former film reviewer on the student radio station Radio Warwick, where he began his broadcasting career. Members of Merchant's "posse" included film critic James King, Dan Warren, Neil the Maskell, and Geraint the Welshman.

In mid-2001, BBC Two aired the first series of The Office, co-written and co-directed by Merchant and Gervais and starring the latter as paper sales office manager David Brent; the show initially received low ratings. Beginning in September 2001, Merchant and Gervais returned to XFM as co-hosts of The Ricky Gervais Show, another Saturday afternoon programme, which led to their fruitful relationship with producer Karl Pilkington.  They took a break from the radio show in mid-2002 in order to film the second series of The Office, which aired that year; in addition to writing and directing the show, Merchant made a cameo performance in the episode "Charity" as a friend of Gareth Keenan's character known by the name Oggy or Oggmonster. (Merchant's father also appears in multiple episodes as an office handyman named Gordon.) Merchant also directed a sitcom pilot called The Last Chancers, which aired on Comedy Lab in November 2002 and became a five-part series broadcast in December on E4.  Merchant and Gervais continued to host The Ricky Gervais Show through 2003, taking another break to film the Office Christmas special, which aired that December. The radio show went off the air indefinitely in January 2004. During 2004, Merchant appeared in a recurring role as a chef on Garth Marenghi's Darkplace and in a cameo on Green Wing, and served as a script associate on the Chris Morris and Charlie Brooker sitcom Nathan Barley. The same year, The Office aired in the U.S to critical acclaim. It went on to win the Golden Globe Award for Best Television Series - Musical or Comedy which both Merchant and Gervais accepted. This was followed in 2005 by a 4th series of the radio show, consisting of six episodes.
Stephen Merchant