Step 4: Select "Layer 1"

Click on "Layer 1" in the Layers palette to select it:

Step 5: Select The Rectangular Marquee Tool

Grab the Rectangular Marquee Tool from the Tools palette:

Step 6: Drag Out A Selection Inside The Image

With the Rectangular Marquee Tool selected, drag out a rectangular selection where you want the photo border to appear inside the image. Typically, you'll want to leave an inch or so of space between the selection and the edges of the photo. In my case, I'm going to leave a bit more room at the bottom of my photo just to frame the woman's face a bit better:

Step 7: Add A Layer Mask

When you're happy with your selection, make sure you still have "Layer 1" selected, then click on the Layer Mask icon at the bottom of the Layers palette:

This adds a layer mask to "Layer 1", and since we had an active selection when we added the layer mask, Photoshop uses the selection to determine which parts of the layer should remain visible and which parts should be hidden from view. Any areas on the layer that were inside the selection remain visible, while areas outside of the selection will now be hidden. If we look at the Layers palette again, we can see that we now have a layer mask thumbnail to the right of the preview thumbnail on "Layer 1", and if we look closely at the thumbnail, we can see a large rectangular area in the center that's filled with white. This is the area that was inside our selection (the area that remains visible). Everything around the white rectangular area is the area that was outside of our selection (the area that will now be hidden), and we can see that it is filled with black:

If we look in our document window, we can see that we now have a white border showing around the edges of the image. The white border is actually "Layer 2", which we filled with white back in Step 3, peaking through from underneath "Layer 1". The only part of "Layer 1" that is still visible is the area that was inside our selection. Everything else on the layer that was outside of the selection is now hidden thanks to the layer mask: