So this bug is still active? Might be old, but has been in for a few versions. If a squirrel climbs onto a tree, then he'll be in the air forever. Whether he comes down, or you burn the tree under him - if you try to attack in melee you'll get a "It's high above out of your reach!".

Try from different angles. There's always some point or angle where you can stab hit or two to it. Same works for black grouse as well when it's flying. For skinning or cutting it to pieces you don't have to get them down from tree, it's enough when you just stand in next to the tree square.

EDIT : Oh yeah... You didn't meant that you can't hit them but that somehow those squirrels do magically float in air at times :) Just remembered that I've seen it happen sometimes as well. Squirrel runs in open field with no trees around and it still gives that message when you try to hit it.

I've only gotten the unreachable message when the squirrels are in or next to a tree.