Download The Plugin
You’ll need the Windows Icon (ICO) file format Photoshop Plugin to export to the .ico file format. You can download the plugin from Telegraphics. The plugin reads and writes ICO files in 1, 4 and 8-bit Indexed and 24-bit RGB modes, and also reads and writes 32-bit “XP” icons (with 8-bit alpha channel).

Because 16 x 16 is such a small canvas area, it can be very difficult to be creative. So instead start your project with a canvas set at 64 x 64 (always use even multiples when you plan on resizing files). Do this by selecting File>New, and opening a new canvas that is 64 x 64 pixels in size.
If you already have a logo you should reduce it to the 16 x 16 size to see if it holds up. If it doesn’t look good at this size, work with the 64 x 64 canvas and try creating a simple design that incorporates colors from your website’s palette.
When you’re ready to test the design select Image>Image Size menu and enter 16 x 16. Click on Resample Image and choose “Bicubic Sharper” from the drop-down menu (CS only for this step). This is the best setting for making sure that an image doesn’t blur as it’s being resized.
Go to File>Save As and make sure you name the file favicon.ico. Under Format you must choose Windows Icon (ICO) from the pulldown menu. This format will only be available in Photoshop after you download and install the plugin. In the next step you’ll need to upload this new file to the root folder of your website, so it’s a good idea to navigate and save it to that location on your hard drive now.
Uploading The Favicon.ico File
Connect to your server and upload your Favicon.ico file to your website. You must place it into the same directory as your home (index) page, and leave it loose, making sure not to put it in an images directory or other folder.
Some browsers will look for a direct link in the HTML source code to your site’s favicon.ico file. You can help these browsers by adding this link in the head section of each page on which you want the Favicon.ico to appear.
Here is the link code to include: link rel=”Shortcut Icon” href=”/favicon.ico”
Troubleshooting
Browser Issues: Microsoft IE 6 for Windows will not display the favicon until the URL has been added to the favorites, and Safari for the MAC will not display an updated favicon until the browser cache has been cleared. But choosing “