Google Adsense Taxes is good resource for learning the basic Tax Implications of Adsense earnings. Here's some useful information mentioned on Adsense Taxes:

Google Adsense income is business income. Since you are getting paid via a 1099-MISC, which means Google is treating you as an independent contractor, the U.S. Government has decided that income is taxable.

Google will be reporting your income to the IRS as one of their expenses.

If you are a Sole Proprietorship then by definition you are both the employer and employee of that business. You are self-employed. According to the IRS, if your net earnings (Using Schedule SE of Form 1040) were more than $400, you must pay self-employment tax on that income.

There's also a tip on How to reduce your Income Tax liability with Google Adsense

Bill earned $300 in 2005 from Adsense. Bill does take advantage of his business deductions, and just adds it to his other income from his job, $30,000, and pays taxes on $30,300 of income.

Jane also earned $300 in 2005 from Adsense and $30,000 from her day job. She deducts all the allowable business expenses from her business, which add up to $1,000. She only has to pay taxes on $29,300 of income!

Allowable Business Expenses include Web-hosting Bills, Advertising For Your Site (Adwords, Overture), Phone, Internet bills, Software, Hardware Purchases, Office Rent, Magazine Subscriptions, Books, etc.

Google India will also have to pay Service Tax for selling advertisement space on its search site to Indian entities.

What part does Google play ?