Do I need to cite an artwork? How would I do it? Is permission needed?

Simply contact artwork's author (since the artwork wasn't published, the author is copyright holder, otherwise it usually would be the publisher), requesting permission to adapt the artwork. I suggest sending the author planned version, so that any potential issues can be assessed and addressed.

(1) I'd say Yes. The citation is usually located below or above the figure in the following form:

(Adapted from “The DeLone and McLean model of information systems success: A ten-year update.”, by DeLone and McLean, 2003, Journal of Management Information Systems, 19(4), p. 24. Copyright 2003 by M.E. Sharpe, Inc. Adapted with permission.).

(2) Since artwork is someone's intellectual property artifact, protected by copyright, it is usually (for an exception, see fair use in the next point) required to cite the artwork (as any other such artifact) to properly credit its authors. The format of citation depends on the publication style you're using (my example above is based on APA Style).

(3) You're required to get permission, unless you want to risk by using the fair use legal doctrine.

(4) If the artwork is part of a figure, see example above; otherwise, other relevant standard citation guidelines for visual elements apply, based on the publication style you use.

You have two issues I can recognize, neither is of how much space a figure takes up.

First, you have an issue of copyright. This applies to any work that is being disseminated in public, especially published or monetary work, yours the former. For copyright, there are certain laws (based on country) that you must follow. This relates to how much of an original piece you need to modify before you are not infringing on the artwork. This is hard to discuss online and without an expert.

The second issue is of academic publication. It is better to be on the safe side, but also taking the risk of not citing some work can look very badly on you, and also be considered plagiarism. Most often, if you would like to use someone elses image with some modifications, you should be citing it as 'Modified from X'. Unless you are using some photograph, and tracing over it to make some line drawing for a particular outline of some device, I would always use the 'modified from' citation.