Categories vs Tags
What's the difference between categories and tags? You first have to know their limitations: transactions must have one and only one category, whereas they can have zero or multiple tags.
How you use them really depends on your own needs. You should create a restricted set of categories to get the "global picture" of your expenses. Tags should then be used to get more detailed information.
Using tags as sub-categories?
Tags can perfectly used as sub-categories, but they're not limited to that. You can tag transactions according to a location, an event (for example your last holidays)...
If you use a particular tag as a sub-category, you might want to specify an associated category. Every time this tag will be added to a transaction, its category will be changed to that tag. This makes categorizing transactions even faster.
To assign a category to a tag
Select Squirrel > Preferences…
Select the "Tags" tab.
Select the desired tag.
Click on the "Implies category" check box.
Select a category in the drop down list.
When this tag will be assigned to a transaction, the category of that transaction will automatically be set to that category.