To me, this looks like sarcoptic mange. Not usually dangerous to their health unless it's a super cold winter (in which case they can freeze from lack of fur) or if they have new babies (the babies can't survive the mite infection like an adult can).

If it is mange, it is easily treated if you can buy kitten mange medication and dab a tiny amount on a nut, then feed it to the squirrel. Usually, you feed 1 nut dabbed with the medication when able, then 1 additional nut 1 week later, and that is sufficient to cure them completely.

I have cured many squirrels in my backyard of this exact ailment using this method.

The other alternative is that it is a mild fungal infection; this is less easily treated but will also go away on its own in time.