How do I know whether or not I should put a color background on an item? For instance, on the baby bib, should I just submit graphics on a transparent background or should the entire templet that I got from cafe press be filled with color? thanks

It is best not to put backgrounds on non-bleed products like apparel. For products with bleed - where the image covers the entire product it usually looks best to have a color background.
http://tutortanith.com

I agree with Tanith. If your design seems wrong without a background, treat the background like a design element and put your text or picture in a specific shape, or add other shapes for interest, fence it into a bordered area, etc.

Sometimes a big square block looks right, but a lot of time, it looks like a big square block.