On October 20, 1850, sixteen Mormon pioneers led by James Edward Pace, Jr. arrived at the banks of Peteetneet Creek (named either for Timpanogos Chief Pah-ti't-ni't or for a Paiute word meaning "our water place") with a mandate from Brigham Young to establish a new settlement. A small fort was built taking the name Peteetneet Creek and more settlers arrived, but by March 23, 1851, Young lost confidence in Pace's leadership and the settlement was reorganized under Bishop Benjamin Cross. At this time the settlement was also renamed for its original founder, first being called "Pacen" but soon changing to "Payson". On January 21, 1853, the City of Payson was incorporated, and the following year the LDS Church organized the Payson Ward of the Utah Stake. By 1860, over 800 people lived in the city.

In 1872, the Payson Tabernacle was dedicated by Wilford Woodruff, and in 1873 the first high school south of Salt Lake City was established (though it closed in 1876 when Brigham Young Academy was opened in Provo). By the end of the 1800s, Payson had an opera house, a horse collar factory, a bank, and population of over 2500.

Payson's next growth spurt came in 1912, following the completion of the Strawberry Valley Reclamation Project. Sugar beets were cultivated, and in October 1913 the Utah-Idaho Sugar Company completed a new sugar mill. The Company's highest yield came in 1915, when 7722 tons of sugar were produced. By 1924, an increase in curly top disease led to the failure of the sugar beet industry and the mill was shuttered by the next year. It was eventually torn down in 1940.

Despite the failure of sugar beets, Payson has continued to thrive as an agricultural community. In the later part of the 20th century, it also experienced significant growth in response to extensive development to the north and the population has more than doubled since 1990. Today, around 20,000 people live in Payson, and numerous buildings dating back to the late 1800s and early 1900s remain. The core of the city was designated the Payson Historic District in 2007, and contains over 400 contributing buildings.