The o-ring goes in the groove on the head of the screw.
You can tell if it is making a good seal by inserting it backwards. If it is real loose it is a bad seal. I was having troubles tuning my bike but then I replaced the little o-ring it made a huge difference. I guess air leaking around the o-ring prevented fuel from being drawn in. Put a drop of oil on the o-ring so it slides in easily.