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Application-Aware Processing

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To configure transaction log handling settings, do the following on the Guest Processing step of the backup job wizard.

Select the Enable application-aware processing check box.
In the Guest OS credentials section, specify the account that will be used to perform the log handling operations on guest operating system of the SQL Server VM, including truncation and backup (i.e. shipment to repository).

For log backup, this account should have the sysadmin server role assigned on that SQL Server VM. See also this Veeam KB article. This is the recommended setting; however, if you need to provide minimal permissions to the account performing backup operation, you can assign the following:

SQL Server instance-level roles: dbcreator and public
Database-level roles: db_backupoperator, db_denydatareader, db_datawriter, public; for system databases (master, model, msdb) - db_backupoperator, db_datareader, db_datawriter, public
Securables: view any definition, view server state

For truncation of SQL Server 2012, SQL Server 2014 and SQL Server 2016 database transaction logs, this account should have the db_backupoperator database role (minimal required) or the sysadmin server role.

Application-Aware Processing Note:

If you want transaction logs to be truncated, note that in case log truncation with the specified account is not a success, Veeam will try to perform it using NT AUTHORITY\SYSTEM account, so for SQL Server 2016, 2014 or 2012 make sure it has sufficient rights (see this Veeam Knowledge Base article for more information).

As for SQL Server 2008 and 2008 R2, default settings in these versions allow for database log truncation by local SYSTEM account (however, if they were modified, make sure this account is permitted to truncate logs).

Also, make sure that Deny log on locally and Deny log on through Terminal Services are turned OFF for the corresponding account (these can be turned on, in particular, due to group policy settings).

Then click the Application button, select the SQL Server VM in the list of processed machines, and click Edit to open its processing settings.
On the General tab, in the Application section, select Require successful processing (recommended) option – this will instruct Veeam to stop the backup process if any VSS errors occur during application quiescence.

Application-Aware Processing Note:

If you want to continue the backup process even if VSS errors occur, you can select Try application processing but ignore failures – this option is recommended to guarantee completion of the job; however, the created backup image will be only crash-consistent.