Was unable to clear enough space on my 5GB S3 despite trying helpful solutions that were posted above. In case you're in the same position, here was my solution.
1. Update iPhone to iOS 14.
2. Close all 3 rings, because who knows how long the update will take you. Entire process took me nearly 4 hours. Not worth breaking your streaks, just to update to watchOS 7 on a S3.
3. Force iCloud backup on your iPhone after closing all 3 rings.
4. After forced iCloud backup: Erase all settings.
5. Pair as new watch.
6. Update to watchOS 7 after doing the bare minimum to pair.
7. Erase all settings.
8. Pair, restoring from backup. Select the backup you created after closing all 3 rings.
Biggest piece of advice I can give if you're going to do this with your S3 is to practice patience. For me, the update failed once while verifying (error claimed not connected to internet). 2nd attempt worked, however both "Preparing" and "Verifying" took forever. Patience. Good luck!
P.S. In retrospect, I would've waited for 7.01. (Which will hopefully not require 3.1GB of space to update.) Just not worth the stress of losing my streaks. (12 days short of 1,000 days straight of closing move goal, for one.)
