Here's how I did it. Decide your seam allowance and how much you're going to hem in the process of gathering. (I hemmed one inch on the top.) Also remember the more fabric you take off at the top, the shorter the finished dress or shirt will be and the smaller the head hole. (I learned this the hard way and had to stitch rip my seam.)
#2.Then pull the threads on either side of the seam. Gather as evenly as possible and as much as you want the length of the sleeve to be. Do this on both sleeves.
#3. Now sew a straight line right below your gathering threads. Make sure the gathers are flat.
This is what it should look like right side out.
Because the dress was a little large on me, I stitched the armhole an inch on both sides.