Does converting PSD to ICO flatten all Photoshop layers?

Yes. The tool composites all visible layers into a single flattened image before generating ICO sizes. Adjustment layers, smart objects, and effects are all merged. For the most control, flatten the PSD yourself before uploading.

Does PSD transparency carry over into the ICO file?

Yes. PSD supports full alpha-channel transparency, and the converter preserves it across all generated ICO sizes. Transparent areas in your PSD will appear transparent in the final icon.