There are pretty clear instructions/a visual guide/live previews/examples in the custom player character UI. You simply apply the expression to the base portrait in your image editing software of choice, crop the image vertically so it only includes the changed part, then import it into the game.
The expressions apply seamlessly to your nude alt, as long as there is no vertical overlap between the face and the clothing like this:
I think you floated the idea of allowing us to substitute alternate art for them at some point, so this is kind of brand.
This will come in the form of custom NPCs. Custom NPCs will have several hardcoded template behaviors you can choose from (and perhaps custom behaviors in the form of Lua scripts or some kind of simple visual scripting solution), one of which will be taking the place of an existing NPC.