There so many scenarios in which this issue occurs.
First thing you need to clear if you are using windows authentication and you are not mentioning any username password in your connection string then:
What happens when you run your code through localhost: when you run your wcf test client from localhost, it will be able to communicate to database as local debug mode application is calling database by your account's service. So it has access to database because devenv.exe is running under your user account.
But when you deploy your web service in IIS. Now understand this service runs under IIS not under your account. So you need to assign access rights to IIS service to access the sql server for windows authentication. Here your web service would not be able to communicate to the SQL server because of access rights issue and Login Failed for user_______ (here your user will come)
So if you are using windows authentication to connect your database, you just have to change the IIS Application pool settings. You need to change IIS Application pool's identity to:
local System (for single windows user).
Network Service (for intranet users or domain users)
Below are the Steps for windows authentication WCF:
•Open IIS (windows+R (run) then type inetmgr, then click ok)
•double click your PC name under Connections
•Click Application Pools
•Select your app pool (DefaultAppPool)
•Then under actions on the right click Advanced Settings:
•Go to Process Model section and
•click on Identity.
•Now select LocalSystem (for single windows authentication user).
or select Network Service (for Intranet users)
Now open your sql server management studio: open run-> then type ssms then press ok in ssms, login using your windows authentication account. open security tab expand logins tab then you will be able to view your account.
Now open properties of your account go to userMapping then select the database you want to connect then check the role membership services you want to use for the selected database click ok. (For network services i.e. intranet users you need to configure above settings for NT AUTHORITY\SYSTEM user too)
add Trusted_Connection=True; property in your connection string. Save it & deploy the web service. Restart app pool.
you will be able to connect the database now.