The Rugby Australia-owned franchise has accepted McKellar's resignation with a year remaining on his contract after the former title-winning Brumbies mentor and Wallabies assistant was unable to guide his star-studded side to the finals.
The Wallabies-laden Tahs finished eighth this year after winning only five of 13 games, the same position as McKellar's first season at the helm with six victories in 2025.
McKellar was reportedly forced to front the club's board last week to explain the disappointing 2026 campaign, which also led the Waratahs letting attack coach Mike Catt go.
McKellar took over from Darren Coleman after Australian rugby's perennial under achievers claimed the wooden spoon in 2024.
Even after watching his team suffer a second loss of the season to the Western Force in the final round last month, McKellar remained optimistic about reviving the Tahs' fortunes.
"I'm contracted for next year and I certainly don't want to worry about that sort of stuff," he said after the second Force defeat about any reservations about continuing in the role.
"You've just got to roll with the punches. Times like this make the good times feel even better, and they'll come.
"We've got a group here that are buying into what we want to do. Nothing changes from my end.
"I'm in this for the long haul, and we'll enjoy a beer together and reflect on the season, and then I'll quickly get to work around turning things around for '27."
Instead he is finishing up after the Waratahs remained the most inconsistent team in the competition on McKellar's watch.
During his tenure, the side recorded memorable wins over the ladder-leading Chiefs and a first victory over the Brumbies in Canberra in a decade.
But too often the Tahs would follow up a great performance with a frustrating one.
"I step away knowing I have given my all to help turn the Waratahs' fortunes around over the last two seasons," McKellar said in a statement on Monday
"As a coaching group, we have all worked incredibly hard to drive positive and necessary change.
"I'd like to thank Dan Palmer, Locky McCaffrey, Mike Catt and Tom Carter for their hard work and support. I'd also like to thank captain Matt Philip for his support.
"As this journey for the Waratahs continues, I wish all the players and staff the very best for the future."
Defence coach Locky McCaffrey will coach the Waratahs in the Super Rugby AU competition in September, but the board is likely to opt for a more experienced operator to succeed McKellar in 2027.
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