An Icelander is a person from Iceland. You use it for nationality, the same way you say a Swede or a Dane: one person is an Icelander; two or more are Icelanders. It is a normal, neutral word — not slang, not rude, and not especially formal. Build it as Iceland + -er, the ending that often means “a person from this place”. Older English once said Iselandman (“Iceland-man”), but Icelander took its place. Careful English keeps the person and the language apart: the person is an Icelander; the language, and the adjective for things from the country, is Icelandic (Icelandic wool, an Icelandic name).