The agency, which provides access to government services such as license applications, birth registrations and payment of fines, nearly doubled its staff during the pandemic - going from 2860 employees to 4950.
In the process it also more than doubled its expenses, exceeding its approved budget by $179 million in 2023.
According to a spokesperson for Customer Service Minister, Jihad Dib, the current number of employees is unsustainable.
"Many of the programs developed in response to the pandemic and natural disasters no longer require this intensive crisis support," they said.
Customer transactions made through Service NSW almost halved between 2021 and 2023, falling from 293 million to 157 million.
"Given the size of the deficit left to us by the former government, it is essential that we continue to be responsible with taxpayer money," the spokesperson said.
Contractors and temporary employees will bear the brunt of the cuts but the agency will also cut senior executive positions.
The government promised during the last election campaign to slash contractor numbers in the public sector by 25 per cent and senior executives by 15 per cent.
The cuts drew criticism from opposition customer service spokesman James Griffin who highlighted Service NSW's positive impact for residents.
"It's another casualty of Labor's union wage deals and budget mismanagement," Mr Griffin said.
"The opposition is very concerned about the impact this will have on the work being done in disaster-recovery payments and fraud prevention."
The agency has no plans to reduce the number of its customer service centres and will open a new centre in Tallawong in northwest Sydney later this year.
Redundant employees will have access to the Workforce Mobility Program, introduced in 2023, which helps employees find roles elsewhere in the public sector.
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