It sounds like you are uploading a 16:9 video at standard definition image dimensions. i.e. 480 pixels high. Their message is just a suggestion that if it was shot at 1280x720 or 1920x1080 (or 3840x2160), it would look better if you uploaded the HD (or UHD) versions instead.

For 16:9 video, upload either 1280x720 or 1920x1080.
That's all you should need to do.

It's 29.97fps, 720x480
Wide screen

I wasn't sure if it was something I wasn't doing in YouTube or Vegas.

I think I'm starting to understand now. I selected WideScreen, but didn't select an HD template ? So it seems I need to use a different template (like the HDV template). I guess this one wasn't HD.

Hold on a second, is this even a high definition project? What is the original source footage and what are your project properties?

Yes.
The original source is 1440x1080. I set the project properties to match the source. I think I just wasn't paying attention to my render settings.

To keep this as simple as possible, get into your project properties and set the full-resolution rendering quality to "best" and the deinterlace method to "interpolate." Then go to render, choose "Sony AVC/MVC" and then select either "Internet 1920x1080-30p" or "Internet 1280x720-30p", render it and upload to YouTube. Done.

If you render it out to XDcam mp4 with the 1440x1080i, then use Handbrake with the decomb filter set to default to make a 1280x720p YouTube upload version, it will kook a heck of a lot better than it will if you render the YouTube version directly using an interpolate deinterlace.

Notice I said, "To keep this as simple as possible", but yes, rendering a high-quality intermediate and using Handbrake will produce a much better looking video.

"rendering a high-quality intermediate and using Handbrake will produce a much better looking video"

Hi John Cline, I also have had a few problems rendering videos for YouTube. Can you explain what you mean by the above statement? I have use Handbrake, but do not understand what you are saying.

Handbrake produces much better looking h.264 video at medium to low bitrates than Vegas but the process is much more involved.

First of all, you must render a video from Vegas in a format which Handbrake recognizes. Personally, I use the free third-party UT Video codec, it is completely lossless and includes both 32bit and 64bit codecs. Handbrake will also recognize DNxHD and MP4 formats, it will not use Cineform renders.

Then you load the intermediate into Handbrake and encode the video for YouTube. Handbrake is pretty deep and there are a lot of adjustable parameters which require knowledge of the art of encoding, this is why I didn't mention it earlier in this thread. However, there have been some tutorials posted here on the forum which do a pretty good job of explaining the process, one in particular which I will link below. YouTube is also full of Handbrake tutorials, but they were made by people with various levels of understanding of h.264 encoding and they all suggest somewhat different parameters.

Here is the link to the UT Video codec:

http://www.videohelp.com/tools/Ut-Video-Codec-Suite

Here is the most referenced Handbrake tutorial here on the Vegas forum:

https://vimeo.com/24640614

XDcam mp4 is lossy, but very good quality for it's small size, comes free with Vegas, and feeds Handbrake well. XDcam mxf would be good except that you lose one of the stereo audio channels. At first I was worried about using a lossy format with such a moderate bitrate, but my results have been so good that I have long since lost that fear. I know that theoretically I am losing quality as compared to a much higher bitrate format DNxHD or a lossless UT codec, but frankly, I can't see it, even when I zoom in on fragments of the image and really look. I feel very confident recommending the XDcam .mp4 to Handbrake h264 workflow. I also use Handbrake with a Constant Quality setting of about 15 and the audio bitrate at it's highest setting. There I can see the quality difference. Handbrake is well known for high quality at low to moderate bitrates, but at high bitrates it is freakin' amazing! I don't think it would look any better if I was allowed to upload uncompressed!