Use a texture or medium color for a background.
Use the Type Mask Tool and make a Letter.
Go to Edit>Copy. Now Edit>Paste. This should make a new layer with the letter cut out of the texture.
Go to Layer>Effects>Inner Shadow. I used the default setting, that looked pretty good. Click ok.
Now we will need to distinguish the letter from the background better. Go to Image>Adjust>Brightness/Contrast. For mine I set Brightness to –50 and Contrast to –50.
Using the Brightness and Contrast to do this is cool. It enables us to preview the cutout effect real-time. Sometimes I will move the brightness around for a few minutes to just get the cutout perfect depending on what I'm working on. It's easy, fast and fully controllable.