[desktop]

I recently found a nice photo on Flickr I wanted to use as the background image on my desktop. I copied the image and then pasted it in Photoshop and resized it to fit my desktop (1680x1050). After doing this I noticed there was still a background color behind my icon text. After spending all morning browsing Google and all the solutions offered (including the ones here) I finally figured out what was wrong.

When saving the image in Photoshop I had used the "Save for Web" dialogue. Instead I saved the same image again only this time using "File>Save As" and picked "JPEG" as the file type. Then I went to my desktop, right-clicked, chose Properties, Desktop tab, browsed to the saved image, and applied.

Viola! Transparent icons.

Note: I also have all the other settings applied that people have mentioned here.