Zmerge is really easy once you understand it. When you have objects in your workspace, even though they are on different layers, they are still at the same elevation. You can reduce the elevation of one object so it goes behind the other - giving the appearence of fusing the two objects together. Here's an example:
Note how the circle seems to sink into the rectangle on the second image. This is a result of using Z-Merge.
Open a new image around 400x400. Using the Path tool, draw a 3D Round circle and a 3D Round rounded rectangle so you can follow along with this example. With the rectangle selected, Click on the Z-merge tool and check the Z-merge toggle box. This puts the rectangle in Z-merge mode. You can verify this by looking in the layer manager. The circle is not in Z-Merge mode.
The secret is to make sure both objects are in z-merge mode in order to elevate one below or above the other. So, let's put the circle in z-merge mode too. Note: Z-Merge does not do well with objects in 2D mode since the middle of the object is the same height as the outer edges of the object.
You only need to elevate one of the objects, it doesn't matter which one. I selected the circle and have adjusted the elevation it to a value of -11. This will place the circle on a plane lower than the rounded rectangle. Now the circle appears to be fused with the rounded rectangle. Drag the circle down through the rectangle and see what happens.
Let's do another example. Open a new image 400x400. Use the Path tool, Custom Shape and select the Apple (S10) from the custom shapes gallery. Note: Hold down the shift key as you draw the apple so it stays in proportion. Use the Line and Arrow tool to draw an arrow. Rotate the arrow about 30 degrees and place the arrow on top of the apple. Put both objects in Z-Merge mode. We want the arrow to appear to go through the apple. Let's lower the elevation of the apple so it goes below the arrow. Notice again, only the apple is selected.
We could have just as easily selected the arrow and elevated it above the apple and gotten the same results. The amount of elevation depends on how high the center of your object is.
Now let's introduce a third object. Draw another 3D Round rounded rectangle. Drag it underneath the apple and arrow. It will automatically be placed below the lowest z-merged objects. Since the apple is at an elevation of -23, we want to raise the blue object up above the apple's elevation. Set the new object to Z-Merge and toggle the Z-Merge mode. Raise the elevation to -12 (-12 is higher than the apple's elevation which is -23). Notice that only the new object is being acted upon. The apple seems to melt into the blue rectangle. If you want to keep your example, right-click, select all objects and merge as a single object.
One final exercise. Make two 3D Round circles (any color) with one larger than the other. Put both in Z-Merge mode. Notice you can merge the two pieces without changing any values because the center of both are higher than the edges. Merge just enough to look like a head on a body.
Make a small black ellipse for an eye. If you attempt to put the eye on the head, it will disappear out of sight because the center of the head is at a higher level. The solution is to put the eye in z-merge mode, then raise the level up to the surface of the head. Duplicate the eye to make the second one. It will have the same attributes. Use the layer manager if you can't find your parts.
Now make one more smaller ellipse in white. Put it in Z-merge mode and move it over the black part of the eye. Again, elevate the white until it shows through. You can keep playing with this by adding arms, legs, etc. - just remember to put each part into zmerge mode. When you're finished, right-click, select all objects and merge as a single object.