Paypal is now required to report to the IRS any user with over $20,000 in sales or 200 transactions in one year. The user or merchant (seller) will also get a form similar to a 1099. You will not pay taxes on the entire amount. You will file a Schedule C with your tax return and report the income and expenses against that income. Every one that receives a Paypal 1099, or whatever they designate the form, should already be keeping business records. If you're not keeping records you'll have to start.
It's very probable most of the small sellers will actually generate a business loss instead of income by the time they get thru with all the deductions they can take. For example business use of the home, vehicle deductions, actual business expenses for things like postage and packing materials and other office supplies. Schedule Cs really aren't all that hard to do. A good tax program will walk you thru it.
Feel free to PM me with any tax questions.