PSD cutouts are Photoshop files that contain only the main subject, without any background. PSD cutouts allow for easier image compositing because the image can be inserted onto an arbitrary background image without having to doctor it first.
The acronym PSD stands for Photoshop Document. It is the default file format for all images created in Adobe Photoshop, a digital image manipulation program that is, as of 2015, popular within the graphic design industry. A cutout is a graphic design term for any image that has had its background removed.
In Photoshop, images can be turned into cutouts via the clipping paths tool. The background can be masked by another layer, or erased.