IE5 runs on pretty much any PPC OS I think, I've certainly seen it on 8.1 and I think it may even work on 7.6. Certain apps do need 9, although mostly only newer apps like Photoshop 7 that you probably won't be running on this machine anyway. iTunes won't work though - you'd have to tell us what apps you want to work on it. Some hardware eg video cards only have drivers for 8.6 or 9, though only newer cards like Radeons that you're probably not using in this Mac anyway. 9 has more advanced features eg multi-user startup, Sherlock, CD burning etc, whereas 8.1 is pretty barebones - 9 is of course the pinnacle of Classic as far as features go.
With 48 MB Ram and a 20 GB disk, I'd definitely stick with 9.1 though, maybe even try to go up to 9.2.2 which some say is slightly faster (but fiddly to install as it's not supported by Apple). 48 MB is plenty for OS 9, in my opinion. There's a lot more 68k code in 8.1 than 9, so the speed boost won't be as great as you might expect. Booting will be faster in 8.1, but 9 is pretty responsive on older machines with a reasonable amount of Ram once it's running