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In this video tutorial, Scott Davenport demonstrates how to create an image file suitable for a watermark in ON1 Photo RAW. He emphasizes the importance of including your logo, name, and a transparent background in the image. The recommended file format for a watermark is PNG. Davenport shows how to remove the white background from an existing JPEG image with black text using masking tools in ON1 Photo RAW. The process is straightforward and involves using the masking tools to eliminate the white background and retain the black text for the watermark.