For most purposes, you only need to do one quick payment test, so it's not worth taking the time to setup PayPal test accounts. You can test a small payment with a live account and a real credit card, and then refund the transaction in PayPal.
If you want to perform more extensive testing, you can setup a sandbox merchant account and a sandbox customer account as described for the PayPal Checkout gateway. The account in Payage must be set to Account Type "Sandbox" and have the correct email address and Token. If you have trouble finding the Website Preferences page for your sandbox merchant account, login to the account and use this link:
https://www.sandbox.paypal.com/cgi-bin/customerprofileweb?cmd=_profile-website-payments