Open your favorite illustrating or photo-editing program, and set the canvas dimension to the size of your finished label. Create your label, using a combination of graphics and text. Export the file to a common image file type, such as JPG, TIFF or PNG.
Print your label graphic onto an iron-on transfer sheet that is compatible with your printer type. Follow the instructions on the package to ensure that you print on the correct side of the paper. Cut out the label, getting close to the text and graphics.
Draw the shape of your label onto a piece of thick paper, making sure that it is the same size as your desired final product. Add a 1/2-inch seam allowance around each edge, and cut out the paper pattern. Use the pattern to cut your label out of a piece of white muslin fabric.
Fold each side of your label by 1/4 inch, and iron the fold in place. Sew around the label, staying as close to the edge as possible. Fold the sides in by 1/4 inch once again, iron, and sew in place.
With your label facing up, lay your cut-out transfer label on top with the ink side facing down. Lay a scrap piece of fabric on top of the label, and iron it in place according to the package directions. Remove the fabric to reveal your final label.