WARNING: This is an extremely long post. It's meant to help beginning Photoshoppers with coloring their design and submitting it. I've noticed a lot of people have questions about coloring/submitting so I figured there should be some sort of tutorial post that they can reference.

Also, it's probably a good idea to use Illustrator in most cases. However, for the heavily detailed designs, vectors just aren't an option. For these cases, use Photoshop.

PHOTOSHOP TUTORIAL

Scanning
I usually scan in a document at 300 dpi in grayscale. The grayscale helps eliminate random colors which may show up in your submission.

Coloring
I will start off by saying that you must make sure to keep your colors separated in their own layers in Photoshop. The reason being, that if you should win, Threadless will want you to turn in a PSD file with all of the colors on different layers. So you may as well keep the colors separated from the get go.

1. Open up your scanned file in Photoshop.

2. Go to Image: Mode: RGB (make sure there is a check mark by RGB).

3. Go to Image: Adjustments: Levels. A dialogue box will pop up. You will see a bunch of peaks and valleys. Pull the left arrow towards the closest peak. Pull the right arrow towards its closest peak. You should see your image become more contrasty.

4. Go to Select: Color range. A dialogue box will pop up. Click on the black outline. There will be an arrow that you can pull back and forth which selects a wider or narrower range of colors. Pull it to the highest it can go (which is 200). You should see your image outlined in white. Hit OK.

5. Go to Edit: Copy. Go to Edit: Paste.

6. You now have your outline on its own layer. If you wanted your outline to be a different color than black then skip Step 5. Create a new layer by going to your Layers Palette, clicking on the arrow on the upper right hand side of the palette, and clicking New Layer. Then go to Edit: Fill. On the first drop down menu, go to Color. A new box will pop up. Click on the color you want the outline to be. Hit OK, and then hit OK again. Then go to your Layers palette, and double click on the title (right now it should be Layer 1). Type in a new name (such as ‘outline’). Keep all of your layers titled so it stays organized.

7. Click on your bottom layer (it should be titled background). Create a new layer (see step 6). Your tool bar should have a paint bucket icon on it (if you hover the mouse over the different tools, the name will show up). If you do not see it, but you see a tool called Gradient Tool, then click on Gradient Tool and hold down. You should see the Paint bucket pop up and you can click on it. You will need to choose your background color. Make sure the background color is the same as the one of the colors in the template provided by Threadless. This will be your shirt color. To choose your color, look towards the bottom portion of the tool bar. You’ll see two squares that are slightly askew from each other. Double click on the top square. A box will pop up. (note: have the Threadless template file open, with the colored shirt you want). Hover your mouse over the Threadless template and it should turn into an eyedropper. Click on the color you want, and hit OK. With the paint bucket tool, simply click once anywhere on your file.

8. Create a new layer. Double click on the color square or look at your Color Swatches to choose one of your colors. Remember to keep your layers titled. Then go to the tool bar and select the Paintbrush or Pencil tool. Simply color in where you wish. If you want to switch to a different color, create a new layer, title it, click on whichever color you want, and begin coloring. Just make sure that you only use one color per layer. Also make sure you save your file every now and then. The last thing you want is for Photoshop to crash, and then you lose all of your work.

Prepping your file for submission
Once your file is all colored in, and ready to go, you have a few more steps to save for Threadless standards.

1. Be sure your layered file is saved. Then go to Layers: Flatten Image. Then go to Image: Image size… A box will pop up. On the resolution part, type in 72. Hit OK.

2. Go to Select: Select all. Then go to Edit: Copy. Then go to File: New. In the box that pops up, make sure the width is 640 pixels, the height is no more than 800 pixels, the mode is RGB, and the resolution is 72. Hit OK.

3. Go to Edit: Paste. Your picture will drop into the new file. You make need to resize it to fit within the smaller frame. Go to Edit: Free transform. Hover your mouse over one of the corner points, and it will turn into a diagonal arrow. Hold down the shift key (to constrain proportions), click and hold the mouse, and drag it so that it becomes smaller. When it’s at a good size, hit return or enter.

4. You may use the paint bucket tool if you want to change the background color. You may also copy + paste the t-shirt provided in the Threadless template to show placement of your design on the shirt. Or you can use your own pictures to show placement.

5. When everything is layed out how you want it, go to File: Save for web. In the drop down menu, you may choose between GIF and JPG. If you choose GIF there will be another drop down menu which shows how many colors are being used. It defaults to 256. At the bottom of the dialogue box it will say how large in size the file is. Make sure it is at least under 250 kb. If it’s over the limit, then click on the 256 colors drop down menu, and select less colors. It’s a balancing act to keep as many colors as possible, but to also keep the file size below the limit. If you decide to use a JPG, you will adjust "Quality" until it's just under 250kb. When everything is just right, hit Save. You will need to give your file a title.

6. Go back to your flattened original image. In your tools bar there is a rectangular marquee tool at the top. Click on this. On the top of the window you will see several options, including a drop down menu for Style. Click on Style: Fixed aspect ratio. Then in the first box type in 100. The second box should be 70. Using the marquee tool, drag it out and select what portion of the picture you want to show up in your thumbnail. While you drag, you can hold down the spacebar to move the selection around. Then copy your selection and paste it into a new document. Go to Image: Image size. Make sure the Constrain proportions box is checked. In the width, type in 100 px. The height should automatically change to 70. Hit OK. Go to File: Save for web. Then do the same that your did for your submission, except make sure it’s under 10 kb, and it has to be a GIF.

7. Close your original file. When it asks if you wish to save the file, hit the option that says Do not save file.

And that’s about it! Just go to Threadless’ submission page, upload your files and you’re good to go!

Added 4.12.09:
I just made a high-res blank tee template that makes it pretty easy to place in your design on a mock-up image. Click here to access it.