Categories are a way of grouping together related posts. A post can belong to multiple categories, and categories can be organized into a hierarchy.
Note that WordPress also provides tags – you may wish to use these in addition to categories. Each post must belong to at least one category.
Categories are added to posts using the categories module, or from the edit posts screen.
You can add new categories and manage existing ones from the Categories dashboard page. Click on the Posts > Categories menu.

You will be presented with a list of your existing categories and a method of adding new categories.

You can add a new category by filling out the fields:

Category name – As expected, the name of your category
Category parent – If you want to create hierarchical categories then select the parent category, otherwise leave at none
Description – Describe what the category is for. This description will appear as a tooltip if you use the category widget
Click Add category to add the new details to the list.
Managing existing categoriesThe list of categories will show you the name, description, and number of posts belonging to each category. If you move your mouse over a category a set of options will appear allowing you to edit, quickedit, or delete that category:

If you click on quickedit the category will change into an edit box and you can rename the category quickly:

If you click on edit you will taken to a separate page where you can edit the name, parent, and description. This functions exactly the same as in adding a category.
Clicking on delete will delete that category.
Deleting a categoryWhen a category is deleted, all posts only in that category will be assigned to the default category. If a post was also in other categories it will remain untouched.
Note that you cannot delete the default category.
Bulk actionsIf you have a lot of categories that you want to delete. you can use the bulk actions feature. Select each category you want to delete using the checkbox to the left of the category name.

If you want to select all categories click the checkbox at the top:

From the bulk actions menu select delete and then click on apply. The categories will be deleted.

If you change your mind about using categories and instead want to convert them to tags you can do so using the category to tag convertor. At the bottom of the manage categories screen is a link to the category to tag convertor.
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Clicking this will take you to a screen where you can select which categories to convert to tags. Make your selection, click on convert categories to tags, and your categories will be removed and tags assigned to the posts that used to be in those categories.

Once upon a time, WordPress.com used to only allow categories to be used.
These allowed for a broad grouping of post topics, but when you wanted to describe a post in more specific terms, more categories were required. That lead to very long category lists inside the blog and very long lists in Categories Widgets. It was also confusing in that what we said were categories other services said were tags.
So we now have tags, as well.
Tags are similar, but instead of a list of words to choose from, you write them in a list (separated by commas) in the Tags Module of your post editing screen. They are free form words and generally describe your post in more detail.
For example, a post titled “Last Night At Burger King” might be filed under the “Dinner” category, but could have tags such as, “burger, chicken fries, chocolate shake, dr. pepper”. Get the gist?
We understand that it may be a bit confusing upon first glance (especially to new bloggers), so here are some common questions and answers that may help you out:
Is Tag the same as tag ? Yes. Capitals letters do not change a tag. Blogging is the same as blogging.
Is there a limit to the number of tags I can have? Yes, the sky. In other words, no.
Tag and Category Archive URLs: If you publish a post attached to a category ‘food’, the URL will look like this:
http://blog.wordpress.com/category/food/
The same post using the tag ‘food’ will look like this:
http://blog.wordpress.com/tag/food/
If you publish a post attached to a category ‘food’ and with the tag ‘rice’, the URLs will look like this:
http://faq.wordpress.com/category/food/
http://faq.wordpress.com/tag/rice/
Is there any advantage to using tags or categories, or both? No. There is no advantage within WordPress.com and external search engines using one or the other.
Do I have to use tags? The use of tags is entirely optional (although each post must be attached to at least one category).
Are categories and tags hierarchical? Categories can be treated that way by making categories children of another. Tags, however, exist in their own right and have no set relationship to anything else.
Adding and deleting categories Please enable Javascript and Flash to view this VideoPress video. Adding & managing categories after the fact Please enable Javascript and Flash to view this VideoPress video. swfobject.embedSWF("http://s0.videopress.com/player.swf?v=1.01", "vvq-1337-wpvideo-1", "605", "452", "10", vvqexpressinstall, { "wmode": "opaque", "allowfullscreen": "true", "allowscriptaccess": "always", "guid": "0M42sPky", "seamlesstabbing": "true", "overstretch": "true" }, vvqparams, vvqattributes); swfobject.embedSWF("http://s0.videopress.com/player.swf?v=1.01", "vvq-1337-wpvideo-2", "605", "452", "10", vvqexpressinstall, { "wmode": "opaque", "allowfullscreen": "true", "allowscriptaccess": "always", "guid": "duPLFt5X", "seamlesstabbing": "true", "overstretch": "true" }, vvqparams, vvqattributes);