Hi scrubbyfish! Here's my input:
1) Beta readers typically are looking for issues of incomplete characterisation, confusing plot flow, anything that needs to be clarified, fleshed out more, or cut because it doesn't add anything. In the case of a novel, you have a whole world in your head, and everything makes sense in the context of that world. The plot happens this way because of this and that, and Character A says something seemingly nonsensical because of this thing in her history that only you know, and everyone needs to know what happened two Sundays ago while characters were buying ice cream because IT'S IMPORTANT TO YOU even if nobody else cares. Beta readers are relying only on what's been written, so what's in your head won't bias their reading.
2) There may be differences in opinion on this. Certainly, beta readers don't expect perfection, otherwise they wouldn't be beta reading it. All the elements of the text should be in place, though, with basic proofreading and some editing done, so they won't be taken out of the story by glaring errors. A second round of more comprehensive editing after receiving their feedback will usually catch more small typos and sentences/paragraphs you want to reword.
They should be given clear instructions to be brutally honest. You're trying to make a great piece of art, and it doesn't help you to hear "I loved it! I loved everything about it!" Good for the ego only in the short term, until strangers read it and shred it apart.
On the flip side, be prepared for negative comments from friends. You need to approach it as an academic exercise, with the understanding that everyone's first book is terrible, Harper Lee notwithstanding.
3) Your sincere thanks and a free e-copy of the book once finalized should do it. I think that's how arebelspy handled it when forum members beta'd his wife's novel. Malaysia41 is nearing the end of a round of beta reading, you may want to talk to her about how she handled it.
4) For beta reading, if you're lucky enough to have friends, virtual or otherwise, who want to read your work and help you out, it's fine to do that step without getting money involved. Keep in mind that beta readers are usually not going to proofread or copy edit your piece, although they may point out specific typos that they noticed. For comprehensive copy editing, as well as more extensive editing like moving parts around, rewriting for better flow, catching any big picture stuff the betas didn't, you should pay someone.
5) I set myself up on fiverr as a copy editor at M41's suggestion so I could help out with her Italy book. If you're interested in talking more or have any other questions, feel free to PM me.