In the first round, either WinTD or you will "flip a coin" (see the Pair a Round dialog box) to decide whether the higher ranked player will be White or Black on the first board. The color for the higher ranked player then alternates through the remaining boards.
In subsequent rounds, WinTD tries to determine which of two players has a better "claim" to a particular color. Within a given score group, WinTD will try to maximize the number of players who receive their "due" color, subject to the limits that you set in the Add/Edit a Section Dialog Box.
Given that two players are to be paired, the colors are assigned based upon the following priority list:
1. If a player has not had equal numbers of each color, she will have priority for the color which she has had the fewest times. If both players are unequal on the same color, the color will go to the player who is most unequal. For instance, if Player A has had Black in both of the first two rounds, and Player B had a bye in round 1 and Black in round two, Player A will get White in round three.
2. If rule 1 isn't sufficient, an attempt is made to give each player the color that they have had least recently. For instance, if Player A has had BWBW and Player B has had BWWB, Player A will get Black in round five, because A had White in round 4 and B had Black. If A has had BWW and B has had WBW, again A will get Black in the next round. (However, see note below).
3. Rules 1 and 2 will only fail to assign a color if two players have identical color histories. In that case, WinTD provides you with two options for assigning the colors:
3a. WinTD gives the "due color" to the higher ranked player. This is the standard and the one with which most players are familiar. To follow this, make sure that the Due Color to Higher Ranked box is checked in the Color Allocation group of the Pairing Rules tab in the Preferences Dialog Box.
3b. WinTD gives the "due color" to the higher ranked player in any score group with even or plus scores, or to the lower ranked player in any minus score group. This is Variation 29E4a in the 5th edition USCF Rule Book. Because it's usually easier to correct any color problems in a large group, WinTD gives the correct color to the player likely to end up in the smaller group--the higher rated player (and thus likely winner) in a plus score group or the lower rated player (likely loser) in a minus score group. For last round pairings, however, there is no reason to favor one player over the other.
For the final round (if you checked the Last Round? box in the Pair a Round dialog box), WinTD will use a "coin flip" to assign colors to players with the same history. This is Variation 29E4c in the rule book.
Where possible, WinTD will also use transpositions and interchanges to improve color assignments, reducing the number of players who have to receive the "wrong" colors. See Color Corrections for details.
Note on (2)
This describes what we call Use Full Color History in the Preference Dialog Box. If you don't choose this, WinTD will only look at the most recent round in deciding who gets the color if the players have identical white vs black imbalances. If the color is imbalance is the same and the last round is the same, there will be no decision at step #2, and the color will be assigned based upon #3. Note that this was the rule prior to the 5th edition of the Rulebook, but using the full color history has replaced it.