The most commonly misused part of any blogging platform is by far the categories features. I’m sure you’ve seen it before, the post that is “Filed In: Updates, LOLCATS, Funny, Images, Pictures, and blah blah blah”. Misused categories can lead to ugly meta data, poor navigation, and even worse SEO. At this point you might be asking yourself, “So why did he mention these ‘tags’ things?” Well, I’m glad you asked.
Categories
WordPress includes Categories and Tags, which you can think of a type of folder system for your posts. When you file your documents away, you typically do so in a format that makes it easier to find things later. To ease this you try and keep as few folders as possible, while still allowing there to be an even break down. It might look something like the following:

This would be a pretty typical folder structure. Now within that folder you will have files. These files are what WordPress would consider Posts. Having a well defined category list is like having a good filing system, when someone wants to find something they will have a very good idea where to look. Since your product is your writing, making it easy to find will help increase your visitors.
A great way to build a good subset of categories is to, before you do a large number of posts, head on over to the ‘Categories’ option of the Posts menu of the WordPress administration area. From here you can create your primary categories and create subcategories (like folders within folders) to better narrow down your content placement.
Tags
So what are these tags I mentioned in the title? Tags are a great way to get users to explore your site. While a post should only have one category assigned to it, you should apply as many tags as are relevant (within reason of course). Tags allow WordPress to create a ‘Related Posts’ section on some themes. This will put a list of posts, with the same tags as the currently viewed article, that contain the same tags. These posts may not have the same category assigned, but their tag can link them together. Sound confusing? Let me break it down a little:
Let’s say you are a food blogger (very common recently). You have 3 categories of Recipes, How-To, and Restaurants. You just wrote a post about a local Italian restaurant that had an excellent wine selection. You also just wrote another post about how to pair wine with your food. In this case, one of these will be under ‘Restaurants’ and the other under ‘How-To’ but wouldn’t these be somewhat related to wine? That’s right, tag it with ‘Wine’. Now, visitors can see your restaurant review, find your tags, click on the ‘Wine’ tag and see all posts (no matter what the category) related to wine. It’s a broader view of your content than just Categories. You’ll see this often used on my blog and how it will help visitors explore your content further.
Essentially Tags are ‘meta’ data. Meta is data about data. Redundant as it may seem, you are used to this. It’s the same as your artist, song, genre, album and other tags for your music. The tags help define, in a short method, the content of your post. To achieve the related posts section of my pages, I use the WordPress Related Posts plugin.
I hope that will shed some light on the difference between Categories and Tags.
For some good reading over at WordPress.com about Categories vs. Tags, follow the link.

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