Category Group vs Sub Categories

Judging from your question, you'd be best served with category groups (CGs) such as 'Discretionary', 'Kids', 'Non-Discretionary'.
CGs are pretty much only used to organize your budget and budget reports and to help you find categories when selecting a category for a transaction. You can't use CGs as a grouping or selection method on non-budget reports (eg. a list of all transactions associated with 'Kids'). So think of how you want to manage the display of your budget subtotals in terms of the CGs, not how you'll use the the CGs day-to-day.

I see you're planning on using Quicken for a small business. While you can mix personal and business in a single dataset in Quicken and use categories and CGs to keep the two apart, consider setting up your small business in a separate Quicken file, although this will only work well if you have separate banking accounts for your business.

You can organize your detailed categories down a number (9?) of levels of subcategories, so you could have a top-level category of 'Non-Discretionary', a subcategory of 'Taxes' and then subcategories of 'Federal', 'State', 'Property', etc. and then further subdivide 'Federal' into 'Withholding', 'Quarterly Estimated' and 'Final April 15' if you so chose. Do try to make each category and subcategory name unique. Quicken will let you have Federal/Withholding and State/Withholding but there are times when you'll wonder if 'Withholding' is the federal or state subcategory.
Fortunately, it's easy to restructure your categories and CGs if you don't like what you did so don't obsess too much on your initial pass as if you don't like it you can change it without having to edit every transaction.

Lastly, be aware of Tags. You can tag each transaction with one or more tags. So for example, you might have 'Kids Books' and 'Lunch Money' as categories and then tags you use of 'David' and 'Paula' if you thought you were interested in understanding how much you spend on books & lunch money for David vs. Paula.