Peel pearl onions and trim slightly at the top and bottom. Place pearl onions in a saucepan and cover with salted water. Bring to a gentle boil and cook until tender, about 15 to 20 minutes. Drain and set aside.

Preheat the oven to 350 degrees F (175 degrees C). Butter an 8x8-inch baking dish.

Melt butter in a skillet over medium heat. Add mushrooms and cook, stirring occasionally, until softened, about 5 minutes. Stir in flour and cook for 1 to 2 minutes. Gradually stir in milk, then add salt, dried sage, 1 teaspoon lemon zest, and lemon juice. Cook, stirring constantly, until sauce thickens, about 5 minutes.

Arrange cooked onions in the prepared baking dish. Pour mushroom sauce evenly over the onions.

Bake in the preheated oven until heated through and bubbling, about 20 minutes. Sprinkle with chopped parsley, remaining lemon zest, and paprika before serving.