Police Minister Michael Gallacher says parlour owners will undergo stringent police checks and will need new licences from February 1.
Under the new requirements, anyone found to have criminal associations or a criminal history related to bikie gangs will be deemed ineligible for the licence, and therefore unable to operate.
All licences will be regulated by the Fair Trading department before being signed off by the police commissioner.
"For far too long the tattoo industry has been a feeding ground for outlaw motorcycle gangs," Mr Gallacher told reporters in Sydney on Thursday.
"And it's not just about licensing ... operators will be required to keep extensive records. A number of these organisations are a front for money laundering," he said.
"The record keeping, as well as the ability of police to walk onto premises without a warrant, is a significant advancement in terms of the police ability to address the concerns in relation to organised crime".
Businesses caught operating without a licence after October 1 this year face an $11,000 fine, plus a further $11,000 for each day they continue to operate. Tattoo artists will also be fined $5,500.
Acting NSW Police Commissioner Nick Kaldas said police would be on the lookout for tattoo parlours operated by "cleanskins" - people with no criminal record - but run by those associated with outlaw motorcycle gangs.
"If they continue to do this business, they're going to find it very hard. They will struggle to get a licence under this regime and they're going to have to get out of business," Mr Kaldas said.
The Fair Trading department has welcomed the move and says the licensing will support legitimate operators by removing criminal elements from the industry.