how to encrypt the password column

You can encrypt columns using SQL Server, ( see: http://msdn.microsoft.com/en-us/library/ms179331.aspx for a walk-through).

You can also use a key given out from the server itself.

The risk of using this is if you had to do data recovery and move the DB to a different server it would be impossible to decrypt the column (reset passwords would be required).

Note: password hashing is not meant for 2-way encryption (where a rogue dba can decrypt it). It is meant for hashing it in a way that allows validation without trivially showing the password to anyone. A low or even moderate level of collisions is in some ways desirable so that it allows the password through (and unfortunately other variants) but with collisions you can never tell what the real password actually was.

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A simple implementation would be to run HashBytes over the password. You compare the (hash of) password provided to the hash stored. Unless someone has a rainbow table ready, they will not be able to find the original password.

INSERT INTO <tbl> (..., passwd) values (...., HashBytes('SHA1', @password))

When validating passwords, you take the hash of the password

SELECT HashBytes('SHA1', @password);

And compare it against the input.

You actually don't want to encrypt it, but rather use a hash function on it. Unless there is an strong requirement to gain access to the unencrypted password.