Categories are hierarchical, while tags are not hierarchical. Basically, this means that you can have a parent category with child subcategories. But with tags, there are never any parent/child relationships – each tag is a 100% standalone entity.
While categories should be broad topics that apply to many different posts, tags are usually more specific and unique to the actual content in that post.
For example, say you wrote a post about Michael Jordan, the famous Chicago Bulls basketball player. Here’s an example of how you might set up the tags and categories:
• Category: Basketball (broad)
• Tags: Michael Jordan, Chicago Bulls (narrow and specific to the post)