I've had bad luck in the past with mediocre online favicon generators. They did a horrible job of resizing my file. I know that 16px by 16px doesn't give you much to work with. The worst feature, or lack of, was proper transparency.
Recently I came across a favicon generator that, I thought, performed very well. You can give it a try for yourself at: http://tools.dynamicdrive.com/favicon/ I made several example favicons from PNG files. You can see each of them below.
In Photoshop I created a new file (File -> New | 160 x 160 | Background: Transparent). Starting with an image at this size makes it a lot easier to work with your new icon. Once you're finished with your design, save your image "for web" (File -> Save For Web). After you select this option, you'll want to change the "Preset" value to "PNG-24" before saving. Saving it as a PNG file will allow for transparency in your design (JPEG files do not support transparency).
Here are my (FREE) samples.
Please feel free to use these for whatever you'd like!