I'd say that you are on the right track, however it is important for them to have someplace to burrow. A pile of sphagnum moss in a corner should do the trick. If it were me, I'd do a substrate of coco fiber/moss rather than the paper towel. It's also important for them to have a moisture gradient- a damp area to hydrate, and a dry area. American toads should not be kept wet.
Regarding feeding- at this size, feed them as much as they will eat, as often as you can. They will grow faster, and be able to eat larger prey sooner. I don't believe there is such a thing as overfeeding when they are small. Dusted fruit flies and bean beetles are also good food sources for the tiny ones.