Traditionally, papel picado is made entirely by hand.

The first step is to draw out the design on paper and then cover the paper with transparent plastic. This will protect the original drawing. In order to produce multiple copies at once, fifty to one hundred sheets of China paper are stacked and then stapled together. Using multiple chisels with differently shaped tips, the artist cuts out pieces of the paper from the stack. This allows the carving of many copies of a design at one time.

The stack is then separated, with each sheet of paper being a papel picado. Each sheet is identical to all the others in the stack. Papel picados (or "banderitas") are typically hung on strings or attached to wooden dowels.

San Salvador Huixcolotla is a municipality in the Mexican state of Puebla and is considered the center of papel picado. It is known for having a large community of craftsman who produce high quality papel picado.

In Huixcolotla, papel picado is primarily produced for the celebrations surrounding the Day of the Dead. Over time, the tool used to make papel picado has changed from scissors to chisels because of the greater precision and detailing they allow. Traditionally, the art of making papel picado has been passed from generation to generation. Around 1930, the art spread from Huixcolota to other parts of Mexico such as Puebla and Tlaxcala. Sometime in the 1960s, papel picado spread to Mexico City and from there to the United States and Europe.

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