Typically reported as vivid, multisensory experiences which may spontaneously resolve, hallucinations are present at high rates during childhood. The risk of associated psychopathology is a major cause of concern. On the one hand, the risk of developing further delusional ideation has been shown to be reduced by better theory of mind skills. On the other hand, ideas of reference, passivity phenomena, and misidentification syndrome have been shown to increase the risk of self-injury or heteroaggressive behaviors. Cognitive psychology and brain-imaging studies have advanced our knowledge of the mechanisms underlying these early-onset hallucinations. Notably, specific functional impairments have been associated with certain phenomenological characteristics of hallucinations in youths, including intrusiveness and the sense of reality. In this review, we provide an update of associated epidemiological and phenomenological factors (including sociocultural context, social adversity, and genetics, considered in relation to the psychosis continuum hypothesis), cognitive models, and neurophysiological findings concerning hallucinations in children and adolescents. Key issues that have interfered with progress are considered and recommendations for future studies are provided.