I pasted a picture on my first page of a document and its below my header (adjusted my page layout so the header was very small). However, it is appearing on the second page - grayed out - as if it is in the header. Can you help?

It is in the header, even if not in the header area. The headers and footers are a separate layer in the document and that layer includes the entire page. It must have been inserted when you were editing a header or footer.

Sections / Headers and Footers in Microsoft Word 2007-2013

If you actually want it in the header, so that it will be less likely to be moved and changed on the first page by mistake, put it in a first-page header. If you want users to be able to easily move or delete it, cut it from the header and put it in the body of the document.