How to fomat long quotes for stories?

What you have is fine. Personally, I would insert a dialogue tag within the paragraph, but you don't have to.

Here's an example:

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"You don't understand," John sighed.

Tom went cold, narrowing his eyes. "Do you know what it's like to watch your friends die?" he shouted. "Do you understand what it means to have to face your children, and even while you see them you see bodies of other dead children? Do you understand the pain and the sickness it brings to kill people? I would love if you could explain it."

John's jaw went tense. "I'm sorry," he said.

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Pick up a book close to you and skim for scenes of dialogue. You should notice that paragraphs occur quite often.

Hope this helped.

Every time a character speaks, it's a new paragraph. You format a longer quote just like a shorter quote. For example:

With a dialogue tag:

"Do you know what it's like to watch your friends die? I do," said McKenzie.

Or an action tag:

"Do you know what it's like to watch your friends die? I do." McKenzie turned away from Marcus and gazed out the cracked window.

Or, you could leave the tag off, and just have the quote by itself as a paragraph:

"Do you know what it's like to watch your friends die? I do."

"You do?" Marcus looked unconvinced. "You mean your friends on World of Warcraft? Don't they resurrect after a few minutes?"

(For simplicity's sake, I'm using shorter quotes, but it works exactly the same as a longer quote.

Dialog always gets a new paragraph, even if there is a long passage of action. Every new speaker gets a new paragraph. If you have a single speaker that takes more than one paragraph for a single piece of dialog, start the quote with quotation marks like normal, but leave off the closing mark. Start the next paragraph with quotes and continue on until the quotation is finished. For example:

John said, "Blah blah blah blah... blah blah.

"Blah blah booger... blah blah blah."