This is an issue that bedevils most beginners and can even create problems for intermediate-level writers. You might think a dialog tag is a simple "he said" after a line of dialog. It can be, but there's more to it than that and I'm going to cover the main problems I come across in my workshops.
A. Placement
Identifying the speaker is essential to make sure the reader knows who's talking at the moment. Eight times out of ten, that means having the dialog tag before, after or in the middle of the first line of dialog in a dialog block.
Right: "Yes, that's my bag," he said. "It's my bag and you can't have it."
Right: He said, "Yes, that's my bag. It's my bag and you can't have it."
Right: "Yes," he said, "that's my bag. It's my bag and you can't have it."
Wrong: "Yes, that's my bag. It's my bag and you can't have it," he said.
B. Punctuation
A line of dialog and its tag are one sentence, not two. For declarative and imperative sentences preceding a dialog tag, you replace the period with a comma. For interrogative and exclamatory sentences, you leave the punctuation as is. If you start a sentence with a dialog tag, you set off the tag from the dialog with a comma. Also, you do not capitalize the dialog tag unless it comes at the beginning of a sentence.
Right: "I ate the chicken," he said.
Right: He said, "I ate the chicken."
Right: "Did you really eat the chicken?" she asked.
Wrong: "I ate the chicken." He said.
Wrong: "I ate the chicken," He said. (Unless it was God who ate the chicken, that is.)
C. Verb Choice
If you're anything like me, you hate redundancy. You don't want to say the same thing more than once and definitely not have multiple instances in close proximity. That brings you into conflict with the mainstay of the dialog tags, "[noun]+say". To counter this, you want to try new and exciting verbs to spice things up. I hate to tell you, but there really aren't that many verbs that work well in dialog tags. "Say", "ask" and "reply" are the big three. For the other verbs that actually do work, you should use them sparingly. You might say, "But that's boring!" Fear not, young one. By and large, dialog tags are invisible. For the most part, the reader doesn't even notice them. Now you ask, "If they're invisible, why have them at all?" The aforementioned point on identifying the speaker is one reason. Another is pacing, which I'll cover later. If you try to be cute and stick in some wonky verb, you risk snagging the reader and losing the suspension of disbelief. That's bad. To keep things flowing smoothly, opt for simplicity. More importantly, make sure you actually know what a verb means before you use it. Take "interject", for instance. If you know your parts of speech, an interjection is an exclamatory word like "Ouch!" or "Dagnabbit!" Logically, you'd conclude that "interject" is a synonym of "exclaim", right? Well, that's not the case. The verb "interject" is actually closer to "interrupt" in meaning. Not quite what you were expecting, now was it? That's another good argument for sticking with simple verbs for dialog tags. Save your frills for the narrative.
Basic: "Will that be all, sir?" the butler asked.
Okay: "Will that be all, sir?" the butler inquired.
Inappropriate: "Will that be all, sir?" the butler interrogated.
D. Modifiers
In the above point, I advocated simplicity as the general rule. I stand by that, but there are occasions when the verb alone doesn't fully express what you're after. The two main ways you modify the verb of a dialog tag is with an adverb or an adverbial phrase. I advise you to be judicious in your use of this technique lest the modifiers lose their impact. How do you learn to be judicious? Practice, my friend. Practice.
Adverb: "I should've known it was you," he said bitterly.
Phrase: "I should've known it was you," he said in a voice that dripped with poison.
E. Omission
You might be thinking, "Why can't we just get rid of these dang things?" I have good news for you. There are two scenarios where you can omit the dialog tags. One is where the last sentence in the preceding paragraph of narrative IDs the speaker. The other is a prolonged exchange between two characters. This second case only works for two speakers. Even if three speakers (much less any more than that) have very distinct voices, the risk of derailing the reader is too high. I actually did an experimental piece once that omitted all dialog tags. It mostly worked, but there was too great a percentage of readers who got tripped up. If you want to do away with dialog tags entirely, switch to writing screenplays or comics. Standard novels still need them.
Prior Identification:
He swallowed hard. He had never been in front of so many people before. Could he really do this? It was too late to back out now. He had to try. Gripping the sides of the podium, he leaned forward to address the crowd.
"My fellow Americans..."
Extended Two-Way Conversation:
"What is it that we're doing again?" Vert asked.
"We're going to save the world," Ment replied.
"But why?"
"Do we need a reason?"
"It'd help, yeah."
"Too bad. There's no reason."
F. Stage Direction
"Surely there's another way to get around using dialog tags," you say. Why, yes, there is. The answer lies in stage direction, actions by the speaker closely related to the dialog. Stage direction can include gestures, expressions and other activities done while speaking. However, if you rattle on too long, it will likely deserve to be broken off into its own paragraph of the narrative. There are two other things to you need to keep in mind. One is that stage direction should come in at the beginning of a dialog block if there is no other identification of the speaker (i.e. a dialog tag). The other is that stage direction cannot be used as a dialog tag.
Right: Dakota shrugged. "What does it matter to me? All I care about is my paycheck. If you can't pay me, I want off this rock."
Right: "What does it matter to me?" Dakota asked. She shrugged. "All I care about is my paycheck. If you can't pay me, I want off this rock."
Right: Dakota shrugged. "What does it matter to me?" she asked. She walked over to the broken speeder and began to pack up her tools. She glanced back at the Captain. "All I care about is my paycheck. If you can't pay me, I want off this rock."
Wrong: "What does it matter to me?" Dakota shrugged. "All I care about is my paycheck. If you can't pay me, I want off this rock."
Wrong: "What does it matter to me? All I care about is my paycheck. If you can't pay me, I want off this rock." Dakota shrugged.
Wrong: Dakota shrugged. "What does it matter to me?" she asked. She walked over to the broken speeder and began to pack up her tools. Why had she agreed to this in the first place? Yeah, she was hard up for some work, but she wasn't expecting to get caught up in a mess like this. Momma always said she had poor judgment. It'd be nice if she wasn't right all the time. "All I care about is my paycheck. If you can't pay me, I want off this rock."
G. Hybrid Tags
The second "right" example from the above section is a little awkward, don't you think? Wouldn't it be great if you could put a dialog tag and the accompanying stage direction together? You can! By turning the stage direction into a subordinate clause, you create what I like to call a hybrid tag. I can't think of any examples of usage I'd label as "wrong", but I do advise you to keep hybrid tags on the short side. Too long and it'll get unwieldy.
Example: "You know," Kirik said, fingering her pendant, "one day you're going to give this to me."
H. Timing
Most of the discussion here has been mechanical in nature, but don't think I'm ignoring the stylistic side of the house. The strategic placement of dialog tags can provide a dramatic pause in a line of dialog. Observe the following examples and the effect the dialog tag has on the reading.
He said, "No, I don't know who you are, but I intend to find out."
"No," he said, "I don't know who you are, but I intend to find out."
"No, I don't know who you are," he said, "but I intend to find out."
"No, I don't know who you are, but I intend to find out," he said.
And there you have it. Stay tuned for your next lesson.