Fresh answer 2018:
Step 1 Launch Microsoft Paint. Not Paint.Net but plain Paint
Step 2 Open the image you want to convert to icon format by clicking the “Paint” toolbar tab and selecting “Open.”
Step 3 Click the “Paint” tab, highlight the “Save As” option and select the “BMP picture” option. As 256-colored. There is a dropdown list.
Step 4 You have to open it in Paint.net now. Enter a file name for the icon and type “.ico” (without quotations) as the file extension. Select your preferred output folder for the icon and click “Save.”(still in bmp type) , exposing auto definition in saving parameters window.
This is a solution for those WHO DOESN'T WANT THE THIRD PARTY APPS TO GAIN PERMISSIONS ON THEIR COMP.
I use this simple way to create custom icons for folders on my desktop or documents.