The 'IF' function in spreadsheet software, like Microsoft Excel, is used for conditional logic. It tests a condition and returns one value if the condition is true and another if it is false. In relation to 'color', the IF function can be used to change the color of cells based on the condition. For example, it can highlight cells with specific values or conditions met by coloring them. The color itself is specified within the function as part of the criteria or as a separate argument.