They are either dreams or illusions– shouldn't matter much, as they fall under reality equalization rules. The protagonist is either a kid, someone dreaming of being a kid, or someone hallucinating being a kid, they have a very short stature, in a children's bedroom, along with FNAF 4's steam description.
It shouldn't matter what they are in reality, as what they are killing to them is, in their reality, a kid. Also, the illusion manip abilities of nightmarionne and whatnot should be removed, as 1. that's only one of their possibilities and 2. That should only be if in their "reality" this affects how they function in some way.
For example, in TADC the characters only have a skeleton when electrocuted, and their clothes are their skin. In there, being made out of code influences their biology. However, we don't have evidence that if a nightmare was to be cut in half, hallucinogenic smoke would come out. A verse in where something similar happens is Sword Art Online, in which, despite the characters being digital and made out of code, their physiology is normal and organic.