The picture must be a square either 128x128, 256x256, or 512x512 pixels in size and saved as a .bmp. For some reason, only specific types of .bmp's will work. Unfortunately, I forget which kind, but I had to convert them using MSPaint. Then, just copy/paste into your "decals" folder in "Texture Library."
I'm not sure how to make .tga's though or other decals with transparent backgrounds. Generally, many of us just export the skin as a chassis texture and edit it as a whole in photoshop or a similar program.