In a recent patch the play with Genetics screen was updated, this shows the life state of the "Sim" and I found out that Sims are Humans, does this mean they are not Sims? I always presumed they were ...
The creator Will Wright's whole point with the Sims was creating a interior decorator simulator and then he decided to put people in it to see how they were doing in their home. That is why the Sims in the Sims one even had a "room" bar to see how the furniture, lights etc effected the Sim. So yeah, it's simulated humans.