This is a very fun project. I used Microsoft Publisher to design the tag. You want to make or print your image 3 times larger than you expect it to be. When you're about done, set your oven to 250 - 300 degrees. Cut it out, I find that a rotary blade works best. If you don't have one, scissors will certainly do the job.
This next two pictures were taken for scale. The tag is huge before it shrinks. Also, it is important to set your picture to transparent or make the ink as light as possible. Once it cooks, it turns quite a bit darker. If you want a hole in it, it's a must to punch it before shrinking because the plastic will be too hard afterwards.