There is also a video version of this tutorial.
To get started, find an image you'd like to use, and open it in the Standard edit mode. If you like, you can use my image to follow along. Download it here: polaroid-start.jpg (right click > Save Target)
If you do use your own image, be sure to do a File > Duplicate and close the original so you don't accidentally overwrite it.
First thing we will do is convert the background to a layer. Double click on the background in the layers palette and name the layer "photo."
Next we make a square selection of the area we want to use for the Polaroid. Select the Rectangular Marquee tool from the toolbox. In the options bar set the mode to "Fixed Aspect Ratio" with width and height both set to 1. This will give us a fixed square selection. Make sure feather is set to 0.
Click and drag a square selection around the focal point of the photo.