Download an existing skin. Use the templates at the bottom of the page.
Step 2:
Edit the skin in your favorite image editor. Here's what I do: I use the "Pencil Tool" in GIMP and I have "hard edge" enabled on the Eraser Tool.
Export it as a PNG file.
BUT WAIT: If you don't use any transparency in your image - like you have a solid color background, anything that has the same color as the second pixel diagonal from the top-left will be turned invisible! So, don't use the background color for any part of the character, because it will become transparent! For example, if you use a solid white background, the white eyes or white teeth will also become transparent.