Go ahead and merge layers if you want. It might make it easier for you if you're going to add a lot more steps, which I intend to do. Just note that you cannot undo this once you get further into the process.
I'm going to show you a really cool way to get the perfect sized shape under an existing shape without having to deal with distortions by adjusting the size. Let's give an outline to our tag. Just like I showed you, above.
Once you've added the stroke in the size you want, duplicate that layer. Then go to your original layer (the one on the bottom) and right click and simply layer. The little fx will disappear and now you can clip in whatever paper you want. I LOVE this tip and use it all of the time. Especially, for word art.
The yellow paper makes a wonderful contrast to the lime green. Go ahead and clip it in like I explained earlier.
You can either make your elements invisible by clicking on the eye in the layers panel or you can delete it AFTER SAVING IT. PSE does not automatically save. I highly recommend saving every few minutes. You can duplicate the bottom or background layer OR you can add a new layer by clicking on the tiny piece of corner folded white paper at the top of the layers panel and then paint bucket whatever color you want it to be. Size it how you want, similar to what I did, below.
Here's another more advanced tip. I didn't think there was enough contrast with the green so I clicked on the circle with two colors at the top of the layers panel and chose levels. Here I can adjust the color exactly how I want. You can see in the pop up menu, that there are a plethora of choices.
Toggle to perfection and then create a clipping mask with it over the exact layer. This way you won't recolor the entire image.