From memory, there are two parts to it. The first thing to do is to set up a rule on the firewall that redirects the traffic, and then you add a rule in the Squid config.
I use shorewall as a network firewall, and there were instructions on the site for transparent proxying. Don't know what the rule would be on raw iptables, but Google can probably tell you.
FWIW, transparent proxying doesn't work with SSL protocols, so it's not very useful in many environments.