Sift the powdered sugar in a bowl with a sifter or fine mesh strainer to remove any clumps.
Add the vanilla extract and water. Stir well until a very thick icing forms.
Separate the icing into four bowls (you'll have about 1 tbsp per bowl) and add 1/4 tsp of natural food coloring to each bowl. Stir well until fully incorporated.
Spoon the icing into four different piping bags and squeeze it down to the bottom. Cut a small tip off of each piping bag.
Using a large surface like a cutting board or large baking sheet, add parchment paper. I find it helpful to tape the parchment paper down!
Working with one color at a time, pipe the icing onto the parchment paper. For classic sprinkles, pipe long lines of each color. You can also pipe hearts, dots, etc! Repeat with all of the icing.
Allow the sprinkles to dry at room temperature overnight, or for at least 12 hours.
Using a spatula, break up the lines to make classic sprinkles, or carefully scrape up shapes of sprinkles.
Add the dried sprinkles to an airtight container and store in a cool, dry place until you're ready to use them!
Video
Notes
I recommend allowing them to dry overnight or at least 12 hours, but this may vary depending on your climate.