Puoi utilizzare la clausola di output per acquisire le righe modificate/inserite in una variabile di tabella e utilizzarla con un'istruzione delete dopo l'unione.
DECLARE @T TABLE(EmployeeID INT);
MERGE Target1 AS T
USING Source1 AS S
ON (T.EmployeeID = S.EmployeeID)
WHEN NOT MATCHED BY TARGET AND S.EmployeeName LIKE 'S%'
THEN INSERT(EmployeeID, EmployeeName) VALUES(S.EmployeeID, S.EmployeeName)
WHEN MATCHED
THEN UPDATE SET T.EmployeeName = S.EmployeeName
WHEN NOT MATCHED BY SOURCE AND T.EmployeeName LIKE 'S%'
THEN DELETE
OUTPUT S.EmployeeID INTO @T;
DELETE Source1
WHERE EmployeeID in (SELECT EmployeeID
FROM @T);