This was Bill's birthday cake from 2011, and one of my first forays into fondant. It was the first time I used gel coloring as opposed to the old school paste, and I instantly switched teams.
I wouldn't be surprised if more companies started to produce the gel formula. Above is the Duff Goldman Electric Color Gel set, augmented with Electric Yellow Gel by Ateco. The deal with the gel colors is you can squeeze them out directly onto your fondant, icing, etc. and not mess around with toothpicks. The paste color required you to stir the stuff up, and then transport it drop-by-drop by toothpick to whatever you were coloring without double-dipping. The squeeze bottles of gel color aren't the most precise measuring instruments I've ever encountered, but I'm getting used to them. DO NOT use the liquid food coloring you find in the spice section at the supermarket; it's not appropriate for coloring fondant. Once you figure out which colors you're using, get your fondant out of its plastic-wrapped package.
And divvy it up into as many portions as you need. In this case I'm doing five, which is just long enough for the fifth one to start drying out by the time I get to it. Keep each portion at least covered in plastic wrap.
Sift a pile of powdered sugar onto your work surface. You may need to knead it into your fondant, as it tends to get sticky from the warmth of your hands kneading the color into it. Shape the fondant into a flattened oval like this, and squeeze the color right into the middle.
If you're unsure of how much color to use, err on the side of less; you can always add more (you can't add less, unless you work more uncolored fondant into it). Fold the oval in half. From this point you should try to play a game of keep-away with the color, because it will stain skin and nails pretty effectively. For this reason it's a good idea to start with the lightest color first. You wouldn't want to start with blue right before coloring yellow fondant, for example; it could rub off your hands and then you'd inadvertently have spring green fondant.
While the color is still inside, I usually coat the whole thing with powdered sugar; my hands, too. I think it provides a bit of a barrier to staining. Looks like a calzone, huh?
It should come as no surprise that I wasn't able to juggle the phone with this sticky wad of permanent color-laced fondant to take photos as I worked the color in. Eventually, unless you're going for some sort of marbled effect, the color should be blended through evenly, and you'll be holding a piece of colored fondant in your hand that might make you nostalgic for the Play-Doh period of your artistic development. Double-wrap the pieces in plastic wrap and store them in a tightly-sealed plastic container away from heat and light.
It's nearly impossible to re-create the exact same shade of fondant, so always make more of a color than you think you'll need; it's better to have extra. If you need to make white fondant, don't use regular vanilla to flavor the fondant; it will tint the fondant slightly (like in the pre-color photo above). Use clear vanilla extract, available in any cake decorating section or store. White White Icing Color by Wilton will also help knock any unwanted color out of fondant, as well as lighten fondant that has too much color in it.
I hope you've enjoyed learning how to make fondant and color it; may you never buy store-bought fondant again!