What is the difference between a WCF Service Application and a WCF Service Library?

I am developing a WCF web service and I used the WCF Service Application template to do that.

Does creating a "WCF Service Application" fulfill this requirement? What are the advantage of creating a WCF Service Library over a WCF Service Application?

A service application includes a website host already setup for you. A service library is a library of services that a host can reference and startup.

If you start with a service library (recommended) you can then choose any host you wish (a windows service, IIS/ASP.NET, or even a console application) and you'd just reference your library from your new host. Choosing a Service Application limits your host to just IIS/ASP.NET (though this might be ok for your purposes, but will limit the protocols you can use).

Edit: Changes in IIS since I wrote this allow for a wider variety of protocols on ASP.NET activated services, so choosing a service application is much less limiting than before.

If all you have is the one project I see only added complexity if you separate for the heck of it. I used a library when I had some particular use cases where I had to host in both a windows service and in IIS.

For IIS you you can move the classes and interfaces to a library but keep your .SVC files in the web project. You must edit the .SVC files to point to the properly qualified classes.