An actor is in character when he acts like the character he is portraying, rather than acting like his real self.
An actor has to be/stay in character from the moment shortly before he steps on the stage until shortly after he leaves it. It is very important to stay in character even when the actor is doing nothing. In children's plays child actors sometimes forget to say in character while they are doing nothing, and turn into passive viewers, at least in the early rehearsals before the director explains to them the importance of staying in character.
Some actors (especially method actors) prefer to stay in character even while on the backstage, others (especially classical actors) don't.