I'm confused by these instructions: http://wiki.dreamhost.com/TYPO3
Should I upload the source file into the same directory as test.com? And should I upload the dummy file into test.com's directory? If not, where do they go?
The source belongs in your home directory - not in your domain directory. Probably so your source is not publicly accessible. And then the dummy package that's extracted from the zipfile goes into your domain directory (test.com).