I notice that, at present, Categories appear to a bit “inert”, in the sense that they govern coloring and have a nice label in the sidebar. But it seems that it ought to be possible eventually to click on a category name and focus on it (i.e. see all items in it, and/or hide everything else). The Hide command is appreciated but “Hide Everything Else” would probably be more useful: I think it’s rarer for a user to think “I don’t want to see Categories A, B, C, E, or F” than to think “I want to see Category D only”.
I suspect you probably want to avoid too many layers of hierarchy, but I also think that, for people with a lot of projects, it may be better to have an extra layer, i.e. Categories, Sub-Categories, and Projects, or Categories, Projects, and Sub-Projects.
[edited for greater clarity on Feb 19th]