Rhabdomyosarcoma (RMS) is a common childhood cancer that shares features with developing skeletal muscle. Yet, the conservation of cellular hierarchy with human muscle development and the identification of molecularly defined tumor-propagating cells has not been reported. Using single-cell RNA-sequencing, DNA-barcode cell fate mapping and functional stem cell assays, we uncovered shared tumor cell hierarchies in RMS and human muscle development. We also identified common developmental stages at which tumor cells become arrested. Fusion-negative RMS cells resemble early myogenic cells found in embryonic and fetal development, while fusion-positive RMS cells express a highly specific gene program found in muscle cells transiting from embryonic to fetal development at 7-7.75 weeks of age. Fusion-positive RMS cells also have neural pathway-enriched states, suggesting less-rigid adherence to muscle-lineage hierarchies. Finally, we identified a molecularly defined tumor-propagating subpopulation in fusion-negative RMS that shares remarkable similarity to bi-potent, muscle mesenchyme progenitors that can make both muscle and osteogenic cells.