How to free up space on iMac?

The files that you have control over are located in the Documents, Downloads, Pictures, Music and Movies folders.  You can use either of the free apps,GrandPerspective to find the largest files on your drive so you can determine if they can be deleted or moved to an external HD for storage.  

Note: don't forget that you can empty the Downloads folder after the apps and/or updates that were downloaded have been installed or applied.  Many users have found a couple of Gigabytes of files in their Downloads folder which are no longer needed. 

Apparently you do not have enough free drive space for the OS reinstall process to proceed.

You'll need to offload about 30-50 GB of data to another drive before you can continue. Start by emptying the trash.

If the disk becomes too full the computer will fail to boot.

Generally speaking, you should always keep a minimum of 10% of the drive's capacity free at all times.

Restart the Mac, connect an external drive and move whatever files you can to that drive. Once those files are moved you can delete them from the startup drive. Again, don't forget to empty the trash.

The largest files will be video files, music and photos. Also, you can safely delete downloads that have been left behind in the downloads folder and on the desktop.

If the Mac already will not boot, there are options that involve using another Mac to access the disk in target disk mode or erasing the startup disk.

You can go into your System Settings --> General --> Storage. It will show you recommendations.

In the "System Information" utility app, there used to be (and maybe still is) a way to identify specific large files that you might consider deleting ("Storage Management" and "Reduce Clutter").