This picture-based tutorial should be useful for quick reference. It obviously doesn't go into as much detail as the video does, but it's great for people who watched the video at least once and want to quickly go back to look at things.
Step 1: Setting up the Source SDK
Download the Source SDK (located in your Steam Library under "Tools"), and make the necessary edits to the gameinfo.txt file located in your /Steam/SteamApps/common/Team Fortress 2/tf/ folder. These edits are explained in the video and are credited to http://forums.tf2maps.net/showthread.php?t=21166.
Configuring the gameinfo path:
Navigate to your /Steam/SteamApps/common/Team Fortress 2/tf/ folder
Find the gameinfo.txt file and open it with notepad or notepad++
Add “ToolsAppId 211” to line 22
Insert "Game |gameinfo_path|." and "Game tf" above line 77
Save the file and close it
Open the Source SDK and click "Edit Game Configurations" under Utilities
Select "Team Fortress 2" and click "Edit..."
In Directory, replace your steam username with "common" (ex: \helljumper777\ replaced with \common\)
Navigate to your /Steam/SteamApps/common/Team Fortress 2/bin/ folder
Find the batch file titled "hlmv.bat" and open this file
Voila! TF2-specific source SDK that should work
Note: If opening HLMV.bat doesn't work, open it with notepad++ and change line 5 to the following:
Save this file and close it.
Step 2: Creating a Dummy Backpack Icon
In order to compile the .mdl file so we can view it in the half-life model viewer, we need to create a dummy backpack icon so the in-game beta importer will allow us to compile. Open photosop and create an all black 512x512 texture. In the center of the image, draw a small white square.
Add an alpha channel, and make sure to color the square white-- just like in the main image. This is important since the in-game importer will not accept backpack icons formatted any other way.
Step 3: Compiling the Model
Open TF2, create a new workshop entry, load all the relevant parts of your model (the .smd files, the textures, etc), and load in the dummy backpack icon.
You can then preview your model to make sure everything was the same as before, but more importantly, press "verify" and then "finish" to compile your model. Don't submit your model yet. Click cancel and exit TF2.
Your compiled model will be in your /Steam/SteamApps/common/Team Fortress 2/tf/models/workshop/player/items/ folder.
Step 4: Half-Life Model Viewer
Open the Source SDK and at the bottom make sure the Engine Version is set to "Source Engine MP" and the Current Game is "Team Fortress 2". Under Applications click "Model Viewer" to open the half-life model viewer (hlmv).
With the hlmv open, click File > Load Model... and open the /workshop/player/items/ folder. Your compiled model will be in a class subfolder, find the .mdl and open it. Change the background color to green for easy background removal by going to Options > Background Color... You can change the lighting by pressing "ctrl+LMB" and moving the mouse around (If the RGB axes are visible, you can turn them off by going to attachments tab and selecting "none").
Printscreen/Screencap the image however you like (using the Print Screen button on your keyboard or using Windows Snipping Tool) and bring it into Photoshop. Resize the canvas to 512x512 pixels and make sure that your icon fits inside a 512x328 region. Remove the green background using whatever method you prefer. The easiest method is by using the background eraser tool (click and hold the eraser tool > choose background eraser tool). Ensure that you have the eraser set to discontiguous and choose and appropriate tolerance (30-50% is usually good).
When the background is removed, select the icon only, go to your channels tab and add a new alpha channel. Fill your selection in the alpha layer with white. Everything else must be completely black.
Again, make sure that your icon fits inside a 512x328 region. This step is extremely important. If your icon is too big, the importer will not allow you to upload the .tga file.
When you are satisfied, save the image as a .tga file (32bits/pixel).
Step 5: Importing with the In-Game Importer
Open TF2, create a new workshop entry, load all the relevant parts of your model (the .smd files, the textures, etc), but this time load in your finalized backpack icon. Preview your model, verify it, and hit "Finish".
Give your workshop entry a title, description, and branding image. Upload it to the workshop!