• Microsoft seem keen to hide these settings. You're looking for 'Sounds' or 'Sound Control Panel'.
• In the ‘Recording’ tab, double-click the appropriate device.
• In the ‘Levels’ tab, adjust the slider down to a level where the audio does not distort. This can be as low as ’3′.
• Adjust the slider as required.

The level to and from some audio devices can be far too high by default - your computer is probably set at 100%.