How to add color swatches:

Catalog > Attributes > Manage Attributes

Select Color

Select Attribute Images

Upload Color Swatch for each color

Save Attribute

Add Appropriate Image for Simple Product:

For each product that has color swatches, you must go to each simple product and upload an image specific to the color

Example:

Sailboat T-Shirt is the configurable product for Charcoal, Grey and Fuschia

Sailboat T-Shirt , Blue - is the simple product

Select this product and upload a Blue product image and be sure to select Base Image, Thumbnail and Small Image.

Do so for the other colors for each product